When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Yue Yuen Industrial (Holdings) (HKG:551), we weren't too upbeat about how things were going.

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 Yue Yuen Industrial (Holdings):

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

0.046 = US$264m ÷ (US$7.3b - US$1.6b) (Based on the trailing twelve months to June 2023).

Thus, Yue Yuen Industrial (Holdings) has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 11%.

See our latest analysis for Yue Yuen Industrial (Holdings)

In the above chart we have measured Yue Yuen Industrial (Holdings)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Yue Yuen Industrial (Holdings).

What Does the ROCE Trend For Yue Yuen Industrial (Holdings) Tell Us?

We are a bit worried about the trend of returns on capital at Yue Yuen Industrial (Holdings). To be more specific, the ROCE was 7.3% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Yue Yuen Industrial (Holdings) becoming one if things continue as they have.

What We Can Learn From Yue Yuen Industrial (Holdings)'s ROCE

In summary, it's unfortunate that Yue Yuen Industrial (Holdings) is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 46% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 1 warning sign for Yue Yuen Industrial (Holdings) that we think you should be aware of.

While Yue Yuen Industrial (Holdings) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.