Yes Optoelectronics (Group)'s (SZSE:002952) Returns On Capital Tell Us There Is Reason To Feel Uneasy

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Yes Optoelectronics (Group) (SZSE:002952), so let's see why.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Yes Optoelectronics (Group):

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

0.00084 = CN¥764k ÷ (CN¥1.1b - CN¥201m) (Based on the trailing twelve months to September 2024).

So, Yes Optoelectronics (Group) has an ROCE of 0.08%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 5.4%.

View our latest analysis for Yes Optoelectronics (Group)

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 Yes Optoelectronics (Group).

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Yes Optoelectronics (Group), given the returns are trending downwards. To be more specific, the ROCE was 11% 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 Yes Optoelectronics (Group) becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Yes Optoelectronics (Group) is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 29% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing: We've identified 3 warning signs with Yes Optoelectronics (Group) (at least 1 which can't be ignored) , and understanding them would certainly be useful.

While Yes Optoelectronics (Group) 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.