Yahoo Finance Be Wary Of YKGI (Catalist:YK9) And Its Returns On Capital
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at YKGI (Catalist:YK9) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on YKGI is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = S$2.5m ÷ (S$48m - S$15m) (Based on the trailing twelve months to December 2023).
Therefore, YKGI has an ROCE of 7.4%. On its own that's a low return, but compared to the average of 4.5% generated by the Hospitality industry, it's much better.
View our latest analysis for YKGI
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 YKGI has performed in the past in other metrics, you can view this free graph of YKGI's past earnings, revenue and cash flow.
The Trend Of ROCE
When we looked at the ROCE trend at YKGI, we didn't gain much confidence. Around four years ago the returns on capital were 16%, but since then they've fallen to 7.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, YKGI has decreased its current liabilities to 31% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line On YKGI's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for YKGI. These growth trends haven't led to growth returns though, since the stock has fallen 31% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
On a final note, we found 6 warning signs for YKGI (1 is potentially serious) you should be aware of.
While YKGI may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
