Xi'an Bright Laser TechnologiesLtd (SHSE:688333) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Having said that, from a first glance at Xi'an Bright Laser TechnologiesLtd (SHSE:688333) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Xi'an Bright Laser TechnologiesLtd:

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

0.024 = CN¥125m ÷ (CN¥6.5b - CN¥1.2b) (Based on the trailing twelve months to March 2024).

Therefore, Xi'an Bright Laser TechnologiesLtd has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.8%.

See our latest analysis for Xi'an Bright Laser TechnologiesLtd

Above you can see how the current ROCE for Xi'an Bright Laser TechnologiesLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Xi'an Bright Laser TechnologiesLtd .

So How Is Xi'an Bright Laser TechnologiesLtd's ROCE Trending?

We weren't thrilled with the trend because Xi'an Bright Laser TechnologiesLtd's ROCE has reduced by 68% over the last five years, while the business employed 748% more capital. That being said, Xi'an Bright Laser TechnologiesLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Xi'an Bright Laser TechnologiesLtd might not have received a full period of earnings contribution from it.

The Bottom Line On Xi'an Bright Laser TechnologiesLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Xi'an Bright Laser TechnologiesLtd is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 66% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know more about Xi'an Bright Laser TechnologiesLtd, we've spotted 2 warning signs, and 1 of them is concerning.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.