Returns On Capital At Zhejiang Crystal-Optech (SZSE:002273) Have Hit The Brakes

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 Zhejiang Crystal-Optech (SZSE:002273) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Zhejiang Crystal-Optech, this is the formula:

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

0.057 = CN¥534m ÷ (CN¥11b - CN¥1.7b) (Based on the trailing twelve months to March 2024).

So, Zhejiang Crystal-Optech has an ROCE of 5.7%. In absolute terms, that's a low return but it's around the Electronic industry average of 5.2%.

See our latest analysis for Zhejiang Crystal-Optech

In the above chart we have measured Zhejiang Crystal-Optech's 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 Zhejiang Crystal-Optech for free.

What Can We Tell From Zhejiang Crystal-Optech's ROCE Trend?

In terms of Zhejiang Crystal-Optech's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 5.7% for the last five years, and the capital employed within the business has risen 81% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Zhejiang Crystal-Optech's ROCE

In conclusion, Zhejiang Crystal-Optech has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 69% 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.

One more thing, we've spotted 1 warning sign facing Zhejiang Crystal-Optech that you might find interesting.

While Zhejiang Crystal-Optech isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

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