YanGuFang International Group (OTCPK:YGFG.F) Will Want To Turn Around Its Return Trends

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Looking at YanGuFang International Group (OTCPK:YGFG.F), it does have a high ROCE right now, but lets see how returns are trending.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for YanGuFang International Group:

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

0.26 = US$7.6m ÷ (US$72m - US$43m) (Based on the trailing twelve months to December 2022).

Thus, YanGuFang International Group has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Food industry average of 11%.

See our latest analysis for YanGuFang International Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for YanGuFang International Group's ROCE against it's prior returns. If you'd like to look at how YanGuFang International Group has performed in the past in other metrics, you can view this free graph of YanGuFang International Group's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of YanGuFang International Group's historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, two years ago it was 58%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, YanGuFang International Group's current liabilities are still rather high at 59% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On YanGuFang International Group's ROCE

To conclude, we've found that YanGuFang International Group is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 85% over the last year, it appears investors are expecting the worst. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing YanGuFang International Group we've found 5 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.