Foshan NationStar OptoelectronicsLtd (SZSE:002449) May Have Issues Allocating Its Capital

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Foshan NationStar OptoelectronicsLtd (SZSE:002449), we've spotted some signs that it could be struggling, so let's investigate.

Understanding 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 Foshan NationStar OptoelectronicsLtd:

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

0.00078 = CN¥3.3m ÷ (CN¥6.4b - CN¥2.2b) (Based on the trailing twelve months to March 2024).

Thus, Foshan NationStar OptoelectronicsLtd has an ROCE of 0.08%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.2%.

See our latest analysis for Foshan NationStar OptoelectronicsLtd

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'd like to look at how Foshan NationStar OptoelectronicsLtd has performed in the past in other metrics, you can view this free graph of Foshan NationStar OptoelectronicsLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Foshan NationStar OptoelectronicsLtd's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 13% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Foshan NationStar OptoelectronicsLtd becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Foshan NationStar OptoelectronicsLtd is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 30% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Foshan NationStar OptoelectronicsLtd (1 makes us a bit uncomfortable) you should be aware of.

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.

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