The Returns At Jiangsu Olive Sensors High-Tech (SZSE:300507) Aren't Growing

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Jiangsu Olive Sensors High-Tech (SZSE:300507), it didn't seem to tick all of these boxes.

Understanding 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 Jiangsu Olive Sensors High-Tech, this is the formula:

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

0.053 = CN¥123m ÷ (CN¥3.0b - CN¥693m) (Based on the trailing twelve months to March 2024).

Thus, Jiangsu Olive Sensors High-Tech has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 6.9%.

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'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.

What Does the ROCE Trend For Jiangsu Olive Sensors High-Tech Tell Us?

The returns on capital haven't changed much for Jiangsu Olive Sensors High-Tech in recent years. Over the past five years, ROCE has remained relatively flat at around 5.3% and the business has deployed 129% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Jiangsu Olive Sensors High-Tech's ROCE

In summary, Jiangsu Olive Sensors High-Tech has simply been reinvesting capital and generating the same low rate of return as before. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 104% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to know some of the risks facing Jiangsu Olive Sensors High-Tech we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.

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