Here's What's Concerning About Shenzhen SNC Opto ElectronicLtd's (SZSE:001326) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think Shenzhen SNC Opto ElectronicLtd (SZSE:001326) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. The formula for this calculation on Shenzhen SNC Opto ElectronicLtd is:

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

0.087 = CN¥112m ÷ (CN¥1.9b - CN¥633m) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen SNC Opto ElectronicLtd has an ROCE of 8.7%. On its own that's a low return, but compared to the average of 5.8% generated by the Electrical industry, it's much better.

Check out our latest analysis for Shenzhen SNC Opto ElectronicLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen SNC Opto ElectronicLtd'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 Shenzhen SNC Opto ElectronicLtd.

How Are Returns Trending?

When we looked at the ROCE trend at Shenzhen SNC Opto ElectronicLtd, we didn't gain much confidence. Around four years ago the returns on capital were 44%, but since then they've fallen to 8.7%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Shenzhen SNC Opto ElectronicLtd has decreased its current liabilities to 33% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Shenzhen SNC Opto ElectronicLtd's ROCE

While returns have fallen for Shenzhen SNC Opto ElectronicLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 37% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to know some of the risks facing Shenzhen SNC Opto ElectronicLtd we've found 3 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

While Shenzhen SNC Opto ElectronicLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.