There Are Reasons To Feel Uneasy About Wuxi Taclink Optoelectronics Technology's (SHSE:688205) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Wuxi Taclink Optoelectronics Technology (SHSE:688205), 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. Analysts use this formula to calculate it for Wuxi Taclink Optoelectronics Technology:

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

0.033 = CN¥73m ÷ (CN¥2.6b - CN¥351m) (Based on the trailing twelve months to June 2024).

Thus, Wuxi Taclink Optoelectronics Technology has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.4%.

See our latest analysis for Wuxi Taclink Optoelectronics Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Wuxi Taclink Optoelectronics Technology.

So How Is Wuxi Taclink Optoelectronics Technology's ROCE Trending?

We weren't thrilled with the trend because Wuxi Taclink Optoelectronics Technology's ROCE has reduced by 80% over the last five years, while the business employed 1,037% more capital. Usually this isn't ideal, but given Wuxi Taclink Optoelectronics Technology conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Wuxi Taclink Optoelectronics Technology might not have received a full period of earnings contribution from it.

On a side note, Wuxi Taclink Optoelectronics Technology has done well to pay down its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Wuxi Taclink Optoelectronics Technology. And there could be an opportunity here if other metrics look good too, because the stock has declined 29% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Wuxi Taclink Optoelectronics Technology does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

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.