If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating Yangtze Optical Fibre And Cable Limited (HKG:6869), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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 Yangtze Optical Fibre And Cable Limited is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = CN¥914m ÷ (CN¥30b - CN¥9.2b) (Based on the trailing twelve months to September 2023).
Thus, Yangtze Optical Fibre And Cable Limited has an ROCE of 4.5%. On its own, that's a low figure but it's around the 5.1% average generated by the Communications industry.
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 analyst report for Yangtze Optical Fibre And Cable Limited .
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Yangtze Optical Fibre And Cable Limited, we didn't gain much confidence. To be more specific, ROCE has fallen from 17% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Key Takeaway
In summary, Yangtze Optical Fibre And Cable Limited is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 64% in the last five years. Therefore based on the analysis done in this article, we don't think Yangtze Optical Fibre And Cable Limited has the makings of a multi-bagger.
One more thing, we've spotted 1 warning sign facing Yangtze Optical Fibre And Cable Limited that you might find interesting.
While Yangtze Optical Fibre And Cable Limited may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.