If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Yangtze Optical Fibre And Cable Limited (HKG:6869) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Yangtze Optical Fibre And Cable Limited, this is the formula:

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

0.034 = CN¥457m ÷ (CN¥21b - CN¥7.8b) (Based on the trailing twelve months to March 2022).

Therefore, Yangtze Optical Fibre And Cable Limited has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 7.6%.

See our latest analysis for Yangtze Optical Fibre And Cable Limited

Above you can see how the current ROCE for Yangtze Optical Fibre And Cable Limited compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Yangtze Optical Fibre And Cable Limited.

What Can We Tell From Yangtze Optical Fibre And Cable Limited's ROCE Trend?

When we looked at the ROCE trend at Yangtze Optical Fibre And Cable Limited, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.4% from 15% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

While returns have fallen for Yangtze Optical Fibre And Cable Limited in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 12% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Like most companies, Yangtze Optical Fibre And Cable Limited does come with some risks, and we've found 1 warning sign that 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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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.