There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Yangtze Optical Fibre And Cable Limited (HKG:6869) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. 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)

0.026 = CN¥546m ÷ (CN¥29b - CN¥8.3b) (Based on the trailing twelve months to March 2024).

Thus, Yangtze Optical Fibre And Cable Limited has an ROCE of 2.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.4%.

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 .

The Trend Of ROCE

On the surface, the trend of ROCE at Yangtze Optical Fibre And Cable Limited doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Yangtze Optical Fibre And Cable Limited's ROCE

In summary, we're somewhat concerned by Yangtze Optical Fibre And Cable Limited's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 41% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Yangtze Optical Fibre And Cable Limited we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com