Capital Allocation Trends At Ningbo Yongxin OpticsLtd (SHSE:603297) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Ningbo Yongxin OpticsLtd (SHSE:603297) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Ningbo Yongxin OpticsLtd:

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

0.086 = CN¥153m ÷ (CN¥2.0b - CN¥208m) (Based on the trailing twelve months to September 2023).

So, Ningbo Yongxin OpticsLtd has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 5.2% generated by the Electronic industry, it's much better.

View our latest analysis for Ningbo Yongxin OpticsLtd

In the above chart we have measured Ningbo Yongxin OpticsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Ningbo Yongxin OpticsLtd .

What Does the ROCE Trend For Ningbo Yongxin OpticsLtd Tell Us?

The trend of ROCE doesn't look fantastic because it's fallen from 11% five years ago, while the business's capital employed increased by 76%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Ningbo Yongxin OpticsLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line On Ningbo Yongxin OpticsLtd's ROCE

In summary, Ningbo Yongxin OpticsLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 94% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Ningbo Yongxin OpticsLtd does have some risks though, and we've spotted 2 warning signs for Ningbo Yongxin OpticsLtd that you might be interested in.

While Ningbo Yongxin OpticsLtd 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.