Shaanxi Lighte Optoelectronics MaterialLtd (SHSE:688150) Has More To Do To Multiply In Value Going Forward

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Shaanxi Lighte Optoelectronics MaterialLtd (SHSE:688150) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Shaanxi Lighte Optoelectronics MaterialLtd:

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

0.078 = CN¥150m ÷ (CN¥2.1b - CN¥155m) (Based on the trailing twelve months to September 2024).

Thus, Shaanxi Lighte Optoelectronics MaterialLtd has an ROCE of 7.8%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 5.0%.

Check out our latest analysis for Shaanxi Lighte Optoelectronics MaterialLtd

Above you can see how the current ROCE for Shaanxi Lighte Optoelectronics MaterialLtd 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 Shaanxi Lighte Optoelectronics MaterialLtd .

What Can We Tell From Shaanxi Lighte Optoelectronics MaterialLtd's ROCE Trend?

There are better returns on capital out there than what we're seeing at Shaanxi Lighte Optoelectronics MaterialLtd. The company has employed 345% more capital in the last five years, and the returns on that capital have remained stable at 7.8%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Shaanxi Lighte Optoelectronics MaterialLtd has done well to reduce current liabilities to 7.5% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line

In conclusion, Shaanxi Lighte Optoelectronics MaterialLtd has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 26% over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Shaanxi Lighte Optoelectronics MaterialLtd does have some risks though, and we've spotted 1 warning sign for Shaanxi Lighte Optoelectronics MaterialLtd that you might be interested in.

While Shaanxi Lighte Optoelectronics MaterialLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.