Shenzhen Jufei Optoelectronics (SZSE:300303) May Have Issues Allocating Its Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Shenzhen Jufei Optoelectronics (SZSE:300303), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Shenzhen Jufei Optoelectronics, this is the formula:

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

0.059 = CN¥213m ÷ (CN¥5.5b - CN¥1.9b) (Based on the trailing twelve months to March 2024).

Thus, Shenzhen Jufei Optoelectronics has an ROCE of 5.9%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 3.9%.

View 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shenzhen Jufei Optoelectronics.

The Trend Of ROCE

When we looked at the ROCE trend at Shenzhen Jufei Optoelectronics, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.9% from 8.4% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Shenzhen Jufei Optoelectronics is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 60% 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.

Shenzhen Jufei Optoelectronics does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

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.

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