There Are Reasons To Feel Uneasy About Jiangsu Rijiu Optoelectronics' (SZSE:003015) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Jiangsu Rijiu Optoelectronics (SZSE:003015) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. To calculate this metric for Jiangsu Rijiu Optoelectronics, this is the formula:

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

0.012 = CN¥12m ÷ (CN¥1.3b - CN¥281m) (Based on the trailing twelve months to September 2023).

Therefore, Jiangsu Rijiu Optoelectronics has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.4%.

View our latest analysis for Jiangsu Rijiu Optoelectronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Rijiu Optoelectronics' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangsu Rijiu Optoelectronics.

What Can We Tell From Jiangsu Rijiu Optoelectronics' ROCE Trend?

In terms of Jiangsu Rijiu Optoelectronics' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 18%, but since then they've fallen to 1.2%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Jiangsu Rijiu Optoelectronics' ROCE

To conclude, we've found that Jiangsu Rijiu Optoelectronics is reinvesting in the business, but returns have been falling. Since the stock has declined 10% over the last three years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Jiangsu Rijiu Optoelectronics (of which 3 are potentially serious!) that you should know about.

While Jiangsu Rijiu Optoelectronics 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.