What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at MLOptic (SHSE:688502), it didn't seem to tick all of these boxes.
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. Analysts use this formula to calculate it for MLOptic:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = CN¥35m ÷ (CN¥1.4b - CN¥149m) (Based on the trailing twelve months to December 2023).
Therefore, MLOptic has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.4%.
In the above chart we have measured MLOptic's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for MLOptic .
What Can We Tell From MLOptic's ROCE Trend?
On the surface, the trend of ROCE at MLOptic doesn't inspire confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 2.9%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a side note, MLOptic has done well to pay down its current liabilities to 11% 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.
What We Can Learn From MLOptic's ROCE
To conclude, we've found that MLOptic is reinvesting in the business, but returns have been falling. Since the stock has declined 49% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think MLOptic has the makings of a multi-bagger.
One more thing to note, we've identified 2 warning signs with MLOptic and understanding them should be part of your investment process.
While MLOptic 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.
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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.
