Capital Allocation Trends At YCIH Green High

Stock Analysis

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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think YCIH Green High-Performance Concrete (HKG:1847) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 YCIH Green High-Performance Concrete, this is the formula:

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

0.039 = CN¥55m ÷ (CN¥4.8b - CN¥3.4b) (Based on the trailing twelve months to December 2022).

So, YCIH Green High-Performance Concrete has an ROCE of 3.9%. Even though it's in line with the industry average of 4.0%, it's still a low return by itself.

See our latest analysis for YCIH Green High-Performance Concrete

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're interested in investigating YCIH Green High-Performance Concrete's past further, check out this free graph of past earnings, revenue and cash flow.

On the surface, the trend of ROCE at YCIH Green High-Performance Concrete doesn't inspire confidence. Around five years ago the returns on capital were 33%, but since then they've fallen to 3.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

On a side note, YCIH Green High-Performance Concrete's current liabilities are still rather high at 71% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

We're a bit apprehensive about YCIH Green High-Performance Concrete because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last three years have experienced a 46% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

YCIH Green High-Performance Concrete does have some risks, we noticed 4 warning signs (and 2 which are concerning) we think you should know about.

While YCIH Green High-Performance Concrete isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Find out whether YCIH Green High-Performance Concrete is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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.

YCIH Green High-Performance Concrete Company Limited engages in the research, development, production, and sale of ready-mixed concrete and related products in the People's Republic of China.

Mediocre balance sheet and slightly overvalued.