What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Yes Optoelectronics (Group) (SZSE:002952), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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 Yes Optoelectronics (Group):

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

0.059 = CN¥53m ÷ (CN¥1.2b - CN¥276m) (Based on the trailing twelve months to September 2023).

So, Yes Optoelectronics (Group) has an ROCE of 5.9%. Even though it's in line with the industry average of 5.7%, it's still a low return by itself.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yes Optoelectronics (Group)'s ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Yes Optoelectronics (Group).

What Does the ROCE Trend For Yes Optoelectronics (Group) Tell Us?

On the surface, the trend of ROCE at Yes Optoelectronics (Group) doesn't inspire confidence. Around five years ago the returns on capital were 30%, but since then they've fallen to 5.9%. However it looks like Yes Optoelectronics (Group) 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 Yes Optoelectronics (Group)'s ROCE

In summary, Yes Optoelectronics (Group) is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 9.2% over the last five 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.

Yes Optoelectronics (Group) does have some risks, we noticed 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

While Yes Optoelectronics (Group) 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.