Returns On Capital Signal Tricky Times Ahead For Opple LightingLTD (SHSE:603515)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Opple LightingLTD (SHSE:603515), it didn't seem to tick all of these boxes.

What Is 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. To calculate this metric for Opple LightingLTD, this is the formula:

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

0.11 = CN¥735m ÷ (CN¥9.4b - CN¥2.8b) (Based on the trailing twelve months to September 2024).

So, Opple LightingLTD has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Household Products industry average of 3.8% it's much better.

View our latest analysis for Opple LightingLTD

In the above chart we have measured Opple LightingLTD's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Opple LightingLTD .

So How Is Opple LightingLTD's ROCE Trending?

On the surface, the trend of ROCE at Opple LightingLTD doesn't inspire confidence. Over the last five years, returns on capital have decreased to 11% from 16% five years ago. However it looks like Opple LightingLTD might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Opple LightingLTD is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 26% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with Opple LightingLTD and understanding these should be part of your investment process.

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.