Shenzhen Jufei Optoelectronics' (SZSE:300303) Returns Have Hit A Wall

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. Having said that, from a first glance at Shenzhen Jufei Optoelectronics (SZSE:300303) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 Shenzhen Jufei Optoelectronics is:

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

0.072 = CN¥251m ÷ (CN¥5.2b - CN¥1.7b) (Based on the trailing twelve months to December 2023).

Therefore, Shenzhen Jufei Optoelectronics has an ROCE of 7.2%. On its own that's a low return, but compared to the average of 5.6% generated by the Semiconductor industry, it's much better.

See 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.

What Does the ROCE Trend For Shenzhen Jufei Optoelectronics Tell Us?

The returns on capital haven't changed much for Shenzhen Jufei Optoelectronics in recent years. The company has consistently earned 7.2% for the last five years, and the capital employed within the business has risen 74% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

Long story short, while Shenzhen Jufei Optoelectronics has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 42% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Shenzhen Jufei Optoelectronics (of which 1 is a bit unpleasant!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.