Wuxi Taclink Optoelectronics Technology (SHSE:688205) Is Reinvesting At Lower Rates Of Return

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. 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 Wuxi Taclink Optoelectronics Technology (SHSE:688205) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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)

0.046 = CN¥100m ÷ (CN¥2.4b - CN¥253m) (Based on the trailing twelve months to December 2023).

Therefore, Wuxi Taclink Optoelectronics Technology has an ROCE of 4.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.3%.

View our latest analysis for Wuxi Taclink Optoelectronics Technology

Above you can see how the current ROCE for Wuxi Taclink Optoelectronics Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Wuxi Taclink Optoelectronics Technology for free.

What Does the ROCE Trend For Wuxi Taclink Optoelectronics Technology Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 23% four years ago, while capital employed has grown 901%. That being said, Wuxi Taclink Optoelectronics Technology 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 Wuxi Taclink Optoelectronics Technology's earnings and if they change as a result from the capital raise.

On a related note, Wuxi Taclink Optoelectronics Technology has decreased its current liabilities to 10% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Wuxi Taclink Optoelectronics Technology is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 49% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing to note, we've identified 3 warning signs with Wuxi Taclink Optoelectronics Technology and understanding them should be part of your investment process.

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.

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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.