To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at DongGuan YuTong Optical TechnologyLtd (SZSE:300790) and its ROCE trend, we weren't exactly thrilled.

What Is 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. The formula for this calculation on DongGuan YuTong Optical TechnologyLtd is:

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

0.028 = CN¥83m ÷ (CN¥4.9b - CN¥1.9b) (Based on the trailing twelve months to September 2023).

So, DongGuan YuTong Optical TechnologyLtd has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.0%.

View our latest analysis for DongGuan YuTong Optical TechnologyLtd

Above you can see how the current ROCE for DongGuan YuTong Optical TechnologyLtd 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 report on analyst forecasts for the company.

What Can We Tell From DongGuan YuTong Optical TechnologyLtd's ROCE Trend?

On the surface, the trend of ROCE at DongGuan YuTong Optical TechnologyLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. However it looks like DongGuan YuTong Optical TechnologyLtd 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'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.

Our Take On DongGuan YuTong Optical TechnologyLtd's ROCE

To conclude, we've found that DongGuan YuTong Optical TechnologyLtd is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 0.8% over the last three years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

DongGuan YuTong Optical TechnologyLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

While DongGuan YuTong Optical TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.