Zhejiang Crystal-Optech (SZSE:002273) Shareholders Will Want The ROCE Trajectory To Continue

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Zhejiang Crystal-Optech (SZSE:002273) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Zhejiang Crystal-Optech is:

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

0.10 = CN¥958m ÷ (CN¥12b - CN¥2.1b) (Based on the trailing twelve months to September 2024).

So, Zhejiang Crystal-Optech has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.5% it's much better.

View our latest analysis for Zhejiang Crystal-Optech

Above you can see how the current ROCE for Zhejiang Crystal-Optech 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 Zhejiang Crystal-Optech for free.

So How Is Zhejiang Crystal-Optech's ROCE Trending?

The trends we've noticed at Zhejiang Crystal-Optech are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 10%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 74%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On Zhejiang Crystal-Optech's ROCE

To sum it up, Zhejiang Crystal-Optech has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 68% return over the last five years. In light of that, we think it's worth looking further into this stock because if Zhejiang Crystal-Optech can keep these trends up, it could have a bright future ahead.

Like most companies, Zhejiang Crystal-Optech does come with some risks, and we've found 1 warning sign that you should be aware of.

While Zhejiang Crystal-Optech 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.