Returns At Sichuan Huiyuan Optical Communication (SZSE:000586) Are On The Way Up

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So when we looked at Sichuan Huiyuan Optical Communication (SZSE:000586) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Sichuan Huiyuan Optical Communication:

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

0.025 = CN¥8.5m ÷ (CN¥550m - CN¥203m) (Based on the trailing twelve months to March 2024).

So, Sichuan Huiyuan Optical Communication has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 4.0%.

View our latest analysis for Sichuan Huiyuan Optical Communication

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 Sichuan Huiyuan Optical Communication.

The Trend Of ROCE

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 2.5%. The amount of capital employed has increased too, by 24%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 37%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

In Conclusion...

In summary, it's great to see that Sichuan Huiyuan Optical Communication can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Astute investors may have an opportunity here because the stock has declined 27% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 3 warning signs for Sichuan Huiyuan Optical Communication you'll probably want to know about.

While Sichuan Huiyuan Optical Communication 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.