What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Shenzhen JPT Opto-Electronics (SHSE:688025) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Shenzhen JPT Opto-Electronics, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = CN¥97m ÷ (CN¥2.7b - CN¥682m) (Based on the trailing twelve months to June 2024).
Thus, Shenzhen JPT Opto-Electronics has an ROCE of 4.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.4%.
In the above chart we have measured Shenzhen JPT Opto-Electronics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shenzhen JPT Opto-Electronics for free.
So How Is Shenzhen JPT Opto-Electronics' ROCE Trending?
We weren't thrilled with the trend because Shenzhen JPT Opto-Electronics' ROCE has reduced by 55% over the last five years, while the business employed 213% more capital. Usually this isn't ideal, but given Shenzhen JPT Opto-Electronics conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Shenzhen JPT Opto-Electronics 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.
What We Can Learn From Shenzhen JPT Opto-Electronics' ROCE
In summary, Shenzhen JPT Opto-Electronics is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 34% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
One more thing, we've spotted 1 warning sign facing Shenzhen JPT Opto-Electronics that you might find interesting.
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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.