Xi'an Bright Laser TechnologiesLtd (SHSE:688333) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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.

Return On Capital Employed (ROCE): What Is It?

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

0.009 = CN¥48m ÷ (CN¥6.9b - CN¥1.6b) (Based on the trailing twelve months to December 2024).

So, Xi'an Bright Laser TechnologiesLtd has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.3%.

View our latest analysis for Xi'an Bright Laser TechnologiesLtd

In the above chart we have measured Xi'an Bright Laser TechnologiesLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Xi'an Bright Laser TechnologiesLtd .

What Does the ROCE Trend For Xi'an Bright Laser TechnologiesLtd Tell Us?

The trend of ROCE doesn't look fantastic because it's fallen from 4.3% five years ago, while the business's capital employed increased by 329%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Xi'an Bright Laser TechnologiesLtd's earnings and if they change as a result from the capital raise.

On a side note, Xi'an Bright Laser TechnologiesLtd's current liabilities have increased over the last five years to 23% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Xi'an Bright Laser TechnologiesLtd's ROCE

To conclude, we've found that Xi'an Bright Laser TechnologiesLtd is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 324% 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.

One more thing: We've identified 2 warning signs with Xi'an Bright Laser TechnologiesLtd (at least 1 which is concerning) , and understanding them would certainly be useful.

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.