To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Yoantion IndustrialLtd (SZSE:301053) and its ROCE trend, we weren't exactly thrilled.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Yoantion IndustrialLtd, this is the formula:

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

0.044 = CN¥27m ÷ (CN¥929m - CN¥317m) (Based on the trailing twelve months to September 2023).

Thus, Yoantion IndustrialLtd has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.1%.

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

So How Is Yoantion IndustrialLtd's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 38% five years ago, while capital employed has grown 288%. That being said, Yoantion IndustrialLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Yoantion IndustrialLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Yoantion IndustrialLtd has done well to pay down its current liabilities to 34% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Yoantion IndustrialLtd's ROCE

In summary, we're somewhat concerned by Yoantion IndustrialLtd's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 17% from where it was year ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 2 warning signs with Yoantion IndustrialLtd (at least 1 which is concerning) , and understanding them would certainly be useful.

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.