Shenzhen JPT Opto-Electronics (SHSE:688025) Is Reinvesting At Lower Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. However, after briefly looking over the numbers, we don't think Shenzhen JPT Opto-Electronics (SHSE:688025) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Shenzhen JPT Opto-Electronics is:

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

0.058 = CN¥119m ÷ (CN¥2.7b - CN¥640m) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen JPT Opto-Electronics has an ROCE of 5.8%. On its own, that's a low figure but it's around the 5.5% average generated by the Electronic industry.

Check out our latest analysis for Shenzhen JPT Opto-Electronics

In the above chart we have measured Shenzhen JPT Opto-Electronics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shenzhen JPT Opto-Electronics for free.

The Trend Of ROCE

We weren't thrilled with the trend because Shenzhen JPT Opto-Electronics' ROCE has reduced by 36% over the last five years, while the business employed 211% more capital. That being said, Shenzhen JPT Opto-Electronics raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Shenzhen JPT Opto-Electronics' earnings and if they change as a result from the capital raise.

The Bottom Line On Shenzhen JPT Opto-Electronics' ROCE

To conclude, we've found that Shenzhen JPT Opto-Electronics is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 50% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to continue researching Shenzhen JPT Opto-Electronics, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Shenzhen JPT Opto-Electronics 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.