Investors Could Be Concerned With Shenzhen Jufei Optoelectronics' (SZSE:300303) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Shenzhen Jufei Optoelectronics (SZSE:300303) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shenzhen Jufei Optoelectronics is:

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

0.058 = CN¥215m ÷ (CN¥5.6b - CN¥1.9b) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen Jufei Optoelectronics has an ROCE of 5.8%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 4.8%.

Check out our latest analysis for Shenzhen Jufei Optoelectronics

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

What Can We Tell From Shenzhen Jufei Optoelectronics' ROCE Trend?

When we looked at the ROCE trend at Shenzhen Jufei Optoelectronics, we didn't gain much confidence. To be more specific, ROCE has fallen from 13% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Shenzhen Jufei Optoelectronics has done well to pay down its current liabilities to 34% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Shenzhen Jufei Optoelectronics' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shenzhen Jufei Optoelectronics. And the stock has followed suit returning a meaningful 87% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know more about Shenzhen Jufei Optoelectronics, we've spotted 5 warning signs, and 1 of them is a bit unpleasant.

While Shenzhen Jufei Optoelectronics 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.