Shenzhen Refond OptoelectronicsLtd (SZSE:300241) Shareholders Will Want The ROCE Trajectory To Continue

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Shenzhen Refond OptoelectronicsLtd (SZSE:300241) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Shenzhen Refond OptoelectronicsLtd:

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

0.0016 = CN¥3.7m ÷ (CN¥3.3b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

So, Shenzhen Refond OptoelectronicsLtd has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 4.9%.

Check out our latest analysis for Shenzhen Refond OptoelectronicsLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Refond OptoelectronicsLtd's ROCE against it's prior returns. If you'd like to look at how Shenzhen Refond OptoelectronicsLtd has performed in the past in other metrics, you can view this free graph of Shenzhen Refond OptoelectronicsLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

Shenzhen Refond OptoelectronicsLtd has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.2% on its capital. Not only that, but the company is utilizing 51% more capital than before, but that's to be expected from a company trying to break into profitability. 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.

The Bottom Line On Shenzhen Refond OptoelectronicsLtd's ROCE

Long story short, we're delighted to see that Shenzhen Refond OptoelectronicsLtd's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 23% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know about the risks facing Shenzhen Refond OptoelectronicsLtd, 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.