What are the first trends to look for to identify a security that could increase in value over the long term? First of all, we would like to identify a growth return on capital employed (ROCE) and at the same time, a based capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a dialing machine. With that in mind, we’ve noticed some promising trends at Yau Lee Holdings (HKG: 406) so let’s look a little deeper.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on Yau Lee Holdings is:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.017 = HK $ 45M ÷ (HK $ 5.3B – HK $ 2.6B) (Based on the last twelve months up to September 2020).
So, Yau Lee Holdings has a ROCE of 1.7%. In the end, that’s a low return and underperforming the construction industry average of 9.1%.
Check out our latest review for Yau Lee Holdings
Historical performance is a great place to start when researching a stock, so above you can see the gauge of Yau Lee Holdings’ ROCE against its past returns. If you want to delve into the history of Yau Lee Holdings earnings, income and cash flow, check out these free graphics here.
What can we say about Yau Lee Holdings’ ROCE trend?
Yau Lee Holdings broke into the dark (profitability) and we’re sure it’s a sight for sore eyes. The company now earns 1.7% of its capital, because five years ago it was suffering losses. While yields increased, the amount of capital employed by Yau Lee Holdings remained stable during the period. That being said, while an increase in efficiency is undoubtedly attractive, it would be helpful to know if the company has any investment plans for the future. After all, a business can only become a multi-bagger in the long run if it continually reinvests itself at high rates of return.
Similarly, the ratio of the company’s current liabilities to total assets declined to 49%, essentially reducing its funding from short-term creditors or suppliers. Shareholders would therefore be happy if the growth in returns came primarily from underlying business performance. Nonetheless, the company bears some potential risks with such high current liabilities, so keep that in mind.
Yau Lee Holdings ROCE Basics
As noted above, Yau Lee Holdings appears to become more efficient at generating returns as capital employed has remained stable but earnings (before interest and taxes) are rising. Given that the stock has delivered 19% to its shareholders over the past five years, it may be fair to think that investors are not yet fully aware of the promising trends. With that in mind, we would take a more detailed look at this stock in case it has more characteristics that could cause it to multiply in the long term.
Like most businesses, Yau Lee Holdings comes with certain risks, and we have found 3 warning signs that you need to be aware of.
Although Yau Lee Holdings doesn’t get the highest yield, take a look at this free list of companies that achieve high returns on their equity with strong balance sheets.
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