Tianjin Jingwei Huikai Optoelectronic (SZSE:300120) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Tianjin Jingwei Huikai Optoelectronic (SZSE:300120), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Tianjin Jingwei Huikai Optoelectronic, this is the formula:

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

0.013 = CN¥45m ÷ (CN¥4.8b - CN¥1.4b) (Based on the trailing twelve months to June 2024).

Therefore, Tianjin Jingwei Huikai Optoelectronic has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.4%.

Check out our latest analysis for Tianjin Jingwei Huikai Optoelectronic

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're interested in investigating Tianjin Jingwei Huikai Optoelectronic's past further, check out this free graph covering Tianjin Jingwei Huikai Optoelectronic's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Tianjin Jingwei Huikai Optoelectronic, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.3% from 7.8% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Tianjin Jingwei Huikai Optoelectronic's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Tianjin Jingwei Huikai Optoelectronic. These trends are starting to be recognized by investors since the stock has delivered a 0.8% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Tianjin Jingwei Huikai Optoelectronic does have some risks though, and we've spotted 2 warning signs for Tianjin Jingwei Huikai Optoelectronic that you might be interested in.

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.