We Like These Underlying Return On Capital Trends At Shaanxi Lighte Optoelectronics MaterialLtd (SHSE:688150)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So when we looked at Shaanxi Lighte Optoelectronics MaterialLtd (SHSE:688150) and its trend of ROCE, we really liked what we saw.

What Is 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. 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)

0.038 = CN¥73m ÷ (CN¥2.0b - CN¥104m) (Based on the trailing twelve months to March 2024).

So, Shaanxi Lighte Optoelectronics MaterialLtd has an ROCE of 3.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.9%.

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'd like, you can check out the forecasts from the analysts covering Shaanxi Lighte Optoelectronics MaterialLtd for free.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Shaanxi Lighte Optoelectronics MaterialLtd is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 3.8% on its capital. Not only that, but the company is utilizing 387% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, Shaanxi Lighte Optoelectronics MaterialLtd has decreased current liabilities to 5.2% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

In summary, it's great to see that Shaanxi Lighte Optoelectronics MaterialLtd has managed to break into profitability and is continuing to reinvest in its business. Since the total return from the stock has been almost flat over the last year, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know about the risks facing Shaanxi Lighte Optoelectronics MaterialLtd, we've discovered 1 warning sign that you should be aware of.

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.