Returns On Capital Signal Tricky Times Ahead For Jiangsu Olive Sensors High-Tech (SZSE:300507)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. In light of that, when we looked at Jiangsu Olive Sensors High-Tech (SZSE:300507) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.041 = CN¥87m ÷ (CN¥2.7b - CN¥598m) (Based on the trailing twelve months to September 2023).

Therefore, Jiangsu Olive Sensors High-Tech has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 6.1%.

View 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangsu Olive Sensors High-Tech.

How Are Returns Trending?

In terms of Jiangsu Olive Sensors High-Tech's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 10% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Jiangsu Olive Sensors High-Tech's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 32% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Jiangsu Olive Sensors High-Tech (including 1 which is potentially serious) .

While Jiangsu Olive Sensors High-Tech may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.