Shaanxi Lighte Optoelectronics MaterialLtd (SHSE:688150) Is Experiencing Growth In Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Shaanxi Lighte Optoelectronics MaterialLtd (SHSE:688150) looks quite promising in regards to its trends of return on capital.

Understanding 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. To calculate this metric for Shaanxi Lighte Optoelectronics MaterialLtd, this is the formula:

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

0.06 = CN¥114m ÷ (CN¥2.1b - CN¥138m) (Based on the trailing twelve months to June 2024).

So, Shaanxi Lighte Optoelectronics MaterialLtd has an ROCE of 6.0%. On its own that's a low return, but compared to the average of 4.3% generated by the Semiconductor industry, it's much better.

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 The Trend Of ROCE Can Tell Us

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 6.0%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 369%. So we're very much inspired by what we're seeing at Shaanxi Lighte Optoelectronics MaterialLtd thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 6.7%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Shaanxi Lighte Optoelectronics MaterialLtd's ROCE

To sum it up, Shaanxi Lighte Optoelectronics MaterialLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Investors may not be impressed by the favorable underlying trends yet because over the last year the stock has only returned 5.3% to shareholders. So with that in mind, we think the stock deserves further research.

One more thing, we've spotted 3 warning signs facing Shaanxi Lighte Optoelectronics MaterialLtd that you might find interesting.

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.

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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.