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. 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 Shenzhen Sunnypol OptoelectronicsLtd (SZSE:002876), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shenzhen Sunnypol OptoelectronicsLtd:

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

0.031 = CN¥82m ÷ (CN¥4.9b - CN¥2.2b) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen Sunnypol OptoelectronicsLtd has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.5%.

Above you can see how the current ROCE for Shenzhen Sunnypol OptoelectronicsLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Shenzhen Sunnypol OptoelectronicsLtd .

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Shenzhen Sunnypol OptoelectronicsLtd's ROCE has reduced by 56% over the last five years, while the business employed 126% more capital. That being said, Shenzhen Sunnypol OptoelectronicsLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Shenzhen Sunnypol OptoelectronicsLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Shenzhen Sunnypol OptoelectronicsLtd's current liabilities are still rather high at 45% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shenzhen Sunnypol OptoelectronicsLtd. However, despite the promising trends, the stock has fallen 29% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know more about Shenzhen Sunnypol OptoelectronicsLtd, we've spotted 3 warning signs, and 1 of them can't be ignored.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.