If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Shenzhen Absen OptoelectronicLtd (SZSE:300389) and its ROCE trend, we weren't exactly thrilled.
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. To calculate this metric for Shenzhen Absen OptoelectronicLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.079 = CN¥130m ÷ (CN¥3.6b - CN¥2.0b) (Based on the trailing twelve months to September 2024).
So, Shenzhen Absen OptoelectronicLtd has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 5.8% generated by the Electronic industry, it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Absen OptoelectronicLtd'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 Shenzhen Absen OptoelectronicLtd.
So How Is Shenzhen Absen OptoelectronicLtd's ROCE Trending?
The trend of ROCE doesn't look fantastic because it's fallen from 14% five years ago, while the business's capital employed increased by 21%. That being said, Shenzhen Absen OptoelectronicLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Shenzhen Absen OptoelectronicLtd 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.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 54%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
Our Take On Shenzhen Absen OptoelectronicLtd's ROCE
While returns have fallen for Shenzhen Absen OptoelectronicLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 28% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
If you want to know some of the risks facing Shenzhen Absen OptoelectronicLtd we've found 4 warning signs (1 is concerning!) that you should be aware of before investing here.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
