Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Yeebo (International Holdings) (HKG:259) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Yeebo (International Holdings) is:

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

0.014 = HK$36m ÷ (HK$2.9b - HK$383m) (Based on the trailing twelve months to March 2024).

Thus, Yeebo (International Holdings) has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.4%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yeebo (International Holdings)'s ROCE against it's prior returns. If you'd like to look at how Yeebo (International Holdings) has performed in the past in other metrics, you can view this free graph of Yeebo (International Holdings)'s past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Yeebo (International Holdings), we didn't gain much confidence. To be more specific, ROCE has fallen from 2.2% 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.

In Conclusion...

We're a bit apprehensive about Yeebo (International Holdings) because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 175% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Yeebo (International Holdings) does have some risks though, and we've spotted 1 warning sign for Yeebo (International Holdings) that you might be interested in.

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.