China Yongda Automobiles Services Holdings (HKG:3669) Will Want To Turn Around Its Return Trends
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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 China Yongda Automobiles Services Holdings (HKG:3669) 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. The formula for this calculation on China Yongda Automobiles Services Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.044 = CN¥804m ÷ (CN¥33b – CN¥15b) (Based on the trailing twelve months to December 2023).
Thus, China Yongda Automobiles Services Holdings has an ROCE of 4.4%. In absolute terms, that’s a low return and it also under-performs the Specialty Retail industry average of 10%.
See our latest analysis for China Yongda Automobiles Services Holdings
In the above chart we have measured China Yongda Automobiles Services Holdings’ 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 China Yongda Automobiles Services Holdings .
The Trend Of ROCE
On the surface, the trend of ROCE at China Yongda Automobiles Services Holdings doesn’t inspire confidence. To be more specific, ROCE has fallen from 21% 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.
On a related note, China Yongda Automobiles Services Holdings has decreased its current liabilities to 45% of total assets. That could partly explain why the ROCE has dropped. What’s more, this can reduce some aspects of risk to the business because now the company’s suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business’ efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 45% is still pretty high, so those risks are still somewhat prevalent.
The Key Takeaway
Bringing it all together, while we’re somewhat encouraged by China Yongda Automobiles Services Holdings’ reinvestment in its own business, we’re aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 59% in the last five years. 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’d like to know about the risks facing China Yongda Automobiles Services Holdings, we’ve discovered 2 warning signs that you should be aware of.
While China Yongda Automobiles Services Holdings 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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Find out whether China Yongda Automobiles Services Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
