Focuslight Technologies (SHSE:688167) Is Experiencing Growth In Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Focuslight Technologies (SHSE:688167) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Focuslight Technologies is:

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

0.029 = CN¥81m ÷ (CN¥3.0b - CN¥145m) (Based on the trailing twelve months to March 2024).

Therefore, Focuslight Technologies has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 3.9%.

View our latest analysis for Focuslight Technologies

In the above chart we have measured Focuslight Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Focuslight Technologies .

What Does the ROCE Trend For Focuslight Technologies Tell Us?

Focuslight Technologies has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 2.9% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Focuslight Technologies is utilizing 441% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Focuslight Technologies has decreased current liabilities to 4.9% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. 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.

In Conclusion...

Long story short, we're delighted to see that Focuslight Technologies' reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 40% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 1 warning sign facing Focuslight Technologies that you might find interesting.

While Focuslight Technologies 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.