If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 YUNDA Holding (SZSE:002120) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. Analysts use this formula to calculate it for YUNDA Holding:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.096 = CN¥2.7b ÷ (CN¥38b - CN¥9.7b) (Based on the trailing twelve months to September 2023).
So, YUNDA Holding has an ROCE of 9.6%. In absolute terms, that's a low return, but it's much better than the Logistics industry average of 7.2%.
In the above chart we have measured YUNDA Holding's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for YUNDA Holding .
What Does the ROCE Trend For YUNDA Holding Tell Us?
When we looked at the ROCE trend at YUNDA Holding, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.6% from 22% five years ago. However it looks like YUNDA Holding might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From YUNDA Holding's ROCE
Bringing it all together, while we're somewhat encouraged by YUNDA Holding's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 64% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.
Like most companies, YUNDA Holding does come with some risks, and we've found 1 warning sign that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.