Xi'an Bright Laser TechnologiesLtd's (SHSE:688333) Returns On Capital Not Reflecting Well On The Business

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. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Xi'an Bright Laser TechnologiesLtd (SHSE:688333) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Xi'an Bright Laser TechnologiesLtd, this is the formula:

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

0.0021 = CN¥11m ÷ (CN¥6.9b - CN¥1.6b) (Based on the trailing twelve months to September 2024).

So, Xi'an Bright Laser TechnologiesLtd has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

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 .

How Are Returns Trending?

We weren't thrilled with the trend because Xi'an Bright Laser TechnologiesLtd's ROCE has reduced by 94% over the last five years, while the business employed 329% more capital. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 23%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 0.2%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From 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. Yet to long term shareholders the stock has gifted them an incredible 110% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing: We've identified 3 warning signs with Xi'an Bright Laser TechnologiesLtd (at least 1 which is concerning) , and understanding these would certainly be useful.

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.