If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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 YAPP Automotive Systems (SHSE:603013) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for YAPP Automotive Systems:

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

0.14 = CN¥620m ÷ (CN¥6.6b - CN¥2.2b) (Based on the trailing twelve months to September 2023).

Therefore, YAPP Automotive Systems has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 6.1% generated by the Auto Components industry.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how YAPP Automotive Systems has performed in the past in other metrics, you can view this free graph of YAPP Automotive Systems' past earnings, revenue and cash flow.

How Are Returns Trending?

Things have been pretty stable at YAPP Automotive Systems, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at YAPP Automotive Systems in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

The Bottom Line On YAPP Automotive Systems' ROCE

In summary, YAPP Automotive Systems isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 3.0% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

YAPP Automotive Systems does have some risks though, and we've spotted 1 warning sign for YAPP Automotive Systems that you might be interested in.

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.