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. And in light of that, the trends we're seeing at Eoptolink Technology's (SZSE:300502) look very promising so lets take a look.

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. To calculate this metric for Eoptolink Technology, this is the formula:

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

0.29 = CN¥2.1b ÷ (CN¥9.8b - CN¥2.6b) (Based on the trailing twelve months to September 2024).

So, Eoptolink Technology has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Electronic industry average of 5.5%.

In the above chart we have measured Eoptolink Technology's 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 Eoptolink Technology .

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Eoptolink Technology. Over the last five years, returns on capital employed have risen substantially to 29%. The amount of capital employed has increased too, by 479%. So we're very much inspired by what we're seeing at Eoptolink Technology thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, Eoptolink Technology has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 920% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Eoptolink Technology does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.