Investors Could Be Concerned With Tianjin Jingwei Huikai Optoelectronic's (SZSE:300120) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Tianjin Jingwei Huikai Optoelectronic (SZSE:300120) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Tianjin Jingwei Huikai Optoelectronic:

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

0.017 = CN¥55m ÷ (CN¥4.6b - CN¥1.4b) (Based on the trailing twelve months to March 2024).

Thus, Tianjin Jingwei Huikai Optoelectronic has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.3%.

View our latest analysis for Tianjin Jingwei Huikai Optoelectronic

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tianjin Jingwei Huikai Optoelectronic's 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 Tianjin Jingwei Huikai Optoelectronic.

What Does the ROCE Trend For Tianjin Jingwei Huikai Optoelectronic Tell Us?

On the surface, the trend of ROCE at Tianjin Jingwei Huikai Optoelectronic doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.7% from 8.0% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Tianjin Jingwei Huikai Optoelectronic's ROCE

While returns have fallen for Tianjin Jingwei Huikai Optoelectronic in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 2 warning signs with Tianjin Jingwei Huikai Optoelectronic (at least 1 which can't be ignored) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.