The Returns On Capital At Yanpai Filtration Technology (SZSE:301081) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Yanpai Filtration Technology (SZSE:301081), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Yanpai Filtration Technology is:

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

0.063 = CN¥74m ÷ (CN¥1.6b - CN¥380m) (Based on the trailing twelve months to June 2024).

Therefore, Yanpai Filtration Technology has an ROCE of 6.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.1%.

View our latest analysis for Yanpai Filtration Technology

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

How Are Returns Trending?

In terms of Yanpai Filtration Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 23% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Yanpai Filtration Technology has done well to pay down its current liabilities to 24% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Yanpai Filtration Technology's ROCE

To conclude, we've found that Yanpai Filtration Technology is reinvesting in the business, but returns have been falling. Since the stock has declined 29% over the last year, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 2 warning signs for Yanpai Filtration Technology that we think you should be aware of.

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.

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.