Returns On Capital At Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd (SHSE:600363) Paint A Concerning Picture

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. 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.

Understanding 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. The formula for this calculation on Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd is:

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

0.0044 = CN¥23m ÷ (CN¥8.2b - CN¥2.9b) (Based on the trailing twelve months to September 2024).

Therefore, Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 5.1%.

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 to see what analysts are forecasting going forward, you should check out our free analyst report for Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.4% from 1.8% five years ago. However it looks like Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd 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.

On a side note, Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd has done well to pay down its current liabilities to 36% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 271% 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.

Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 600363 on our platform quite valuable.

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.

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.