If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at CETC Acoustic-Optic-Electronic Technology (SHSE:600877) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on CETC Acoustic-Optic-Electronic Technology is:

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

0.07 = CN¥159m ÷ (CN¥2.8b - CN¥547m) (Based on the trailing twelve months to September 2023).

Therefore, CETC Acoustic-Optic-Electronic Technology has an ROCE of 7.0%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 4.2%.

Check out our latest analysis for CETC Acoustic-Optic-Electronic Technology

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 CETC Acoustic-Optic-Electronic Technology's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For CETC Acoustic-Optic-Electronic Technology Tell Us?

When we looked at the ROCE trend at CETC Acoustic-Optic-Electronic Technology, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 7.0% from 14% four years ago. 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 related note, CETC Acoustic-Optic-Electronic Technology has decreased its current liabilities to 19% 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.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for CETC Acoustic-Optic-Electronic Technology have fallen, meanwhile the business is employing more capital than it was four years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 225%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing to note, we've identified 2 warning signs with CETC Acoustic-Optic-Electronic Technology and understanding these should be part of your investment process.

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.