Is There More Growth In Store For Yufo Electronics' (GTSM:6194) Returns On Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Yufo Electronics' (GTSM:6194) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Yufo Electronics is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.12 = NT$223m ÷ (NT$2.2b - NT$378m) (Based on the trailing twelve months to September 2020).

Therefore, Yufo Electronics has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Electronic industry.

Check out our latest analysis for Yufo Electronics

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Yufo Electronics, check out these free graphs here.

How Are Returns Trending?

It's great to see that Yufo Electronics has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 12% on their capital employed. In regards to capital employed, Yufo Electronics is using 25% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

What We Can Learn From Yufo Electronics' ROCE

In a nutshell, we're pleased to see that Yufo Electronics has been able to generate higher returns from less capital. Since the stock has returned a solid 72% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Yufo Electronics can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for Yufo Electronics that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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