There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Union OptechLtd (SZSE:300691) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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 Union OptechLtd, this is the formula:

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

0.029 = CN¥58m ÷ (CN¥2.6b - CN¥631m) (Based on the trailing twelve months to June 2023).

Thus, Union OptechLtd has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.3%.

View our latest analysis for Union OptechLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Union OptechLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Union OptechLtd, check out these free graphs here.

What Does the ROCE Trend For Union OptechLtd Tell Us?

In terms of Union OptechLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 5.4%, but since then they've fallen to 2.9%. However it looks like Union OptechLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Union OptechLtd has decreased 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. 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.

Our Take On Union OptechLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Union OptechLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 23% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One final note, you should learn about the 3 warning signs we've spotted with Union OptechLtd (including 2 which make us uncomfortable) .

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.