Here's What's Concerning About Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's (SHSE:600363) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd (SHSE:600363) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd:

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

0.0046 = CN¥23m ÷ (CN¥7.9b - CN¥2.9b) (Based on the trailing twelve months to June 2024).

Thus, Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 4.8%.

Check out our latest analysis for Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd

Above you can see how the current ROCE for Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd for free.

The Trend Of ROCE

When we looked at the ROCE trend at Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd, we didn't gain much confidence. Around five years ago the returns on capital were 1.0%, but since then they've fallen to 0.5%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd has done well to pay down its current liabilities to 37% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd. Furthermore the stock has climbed 76% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you're still interested in Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd it's worth checking out our FREE intrinsic value approximation for 600363 to see if it's trading at an attractive price in other respects.

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.