What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Shenzhen Refond OptoelectronicsLtd (SZSE:300241) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 Shenzhen Refond OptoelectronicsLtd is:

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

0.021 = CN¥48m ÷ (CN¥3.2b - CN¥977m) (Based on the trailing twelve months to March 2024).

Therefore, Shenzhen Refond OptoelectronicsLtd has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 4.5%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Refond OptoelectronicsLtd's ROCE against it's prior returns. If you're interested in investigating Shenzhen Refond OptoelectronicsLtd's past further, check out this free graph covering Shenzhen Refond OptoelectronicsLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Shenzhen Refond OptoelectronicsLtd in recent years. The company has employed 51% more capital in the last five years, and the returns on that capital have remained stable at 2.1%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

In conclusion, Shenzhen Refond OptoelectronicsLtd has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has declined 39% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know about the risks facing Shenzhen Refond OptoelectronicsLtd, we've discovered 1 warning sign that you should be aware of.

While Shenzhen Refond OptoelectronicsLtd 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.