If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Focuslight Technologies (SHSE:688167) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Focuslight Technologies, this is the formula:

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

0.0078 = CN¥22m ÷ (CN¥3.0b - CN¥145m) (Based on the trailing twelve months to March 2024).

Thus, Focuslight Technologies has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 3.9%.

In the above chart we have measured Focuslight Technologies' 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 Focuslight Technologies .

So How Is Focuslight Technologies' ROCE Trending?

We're delighted to see that Focuslight Technologies is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.8% on its capital. And unsurprisingly, like most companies trying to break into the black, Focuslight Technologies is utilizing 441% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 4.9%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Focuslight Technologies has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Focuslight Technologies' ROCE

Overall, Focuslight Technologies gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 49% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 2 warning signs for Focuslight Technologies you'll probably want to know about.

While Focuslight Technologies 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com