There Are Reasons To Feel Uneasy About Ningbo Yongxin OpticsLtd's (SHSE:603297) 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? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. In light of that, when we looked at Ningbo Yongxin OpticsLtd (SHSE:603297) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Ningbo Yongxin OpticsLtd is:

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

0.062 = CN¥118m ÷ (CN¥2.2b - CN¥331m) (Based on the trailing twelve months to September 2024).

Thus, Ningbo Yongxin OpticsLtd has an ROCE of 6.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.8%.

See our latest analysis for Ningbo Yongxin OpticsLtd

Above you can see how the current ROCE for Ningbo Yongxin OpticsLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Ningbo Yongxin OpticsLtd .

What Can We Tell From Ningbo Yongxin OpticsLtd's ROCE Trend?

In terms of Ningbo Yongxin OpticsLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.2% from 9.6% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Ningbo Yongxin OpticsLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Ningbo Yongxin OpticsLtd's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 205% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing Ningbo Yongxin OpticsLtd, we've discovered 3 warning signs 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.