Returns On Capital At Jiangsu Olive Sensors High-Tech (SZSE:300507) Have Stalled

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Jiangsu Olive Sensors High-Tech (SZSE:300507), 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. To calculate this metric for Jiangsu Olive Sensors High-Tech, this is the formula:

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

0.056 = CN¥128m ÷ (CN¥3.0b - CN¥678m) (Based on the trailing twelve months to September 2024).

Therefore, Jiangsu Olive Sensors High-Tech has an ROCE of 5.6%. In absolute terms, that's a low return but it's around the Auto Components industry average of 7.0%.

See our latest analysis for Jiangsu Olive Sensors High-Tech

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Olive Sensors High-Tech's ROCE against it's prior returns. If you're interested in investigating Jiangsu Olive Sensors High-Tech's past further, check out this free graph covering Jiangsu Olive Sensors High-Tech's past earnings, revenue and cash flow.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Jiangsu Olive Sensors High-Tech. The company has employed 117% more capital in the last five years, and the returns on that capital have remained stable at 5.6%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

In conclusion, Jiangsu Olive Sensors High-Tech has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 127% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Jiangsu Olive Sensors High-Tech does have some risks though, and we've spotted 2 warning signs for Jiangsu Olive Sensors High-Tech that you might be interested in.

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.