Here's What's Concerning About Leyard Optoelectronic's (SZSE:300296) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Leyard Optoelectronic (SZSE:300296), the trends above didn't look too great.

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. The formula for this calculation on Leyard Optoelectronic is:

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

0.052 = CN¥518m ÷ (CN¥15b - CN¥5.0b) (Based on the trailing twelve months to September 2023).

Therefore, Leyard Optoelectronic has an ROCE of 5.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.5%.

Check out our latest analysis for Leyard Optoelectronic

In the above chart we have measured Leyard Optoelectronic's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Leyard Optoelectronic .

What Does the ROCE Trend For Leyard Optoelectronic Tell Us?

There is reason to be cautious about Leyard Optoelectronic, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 18% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Leyard Optoelectronic to turn into a multi-bagger.

Our Take On Leyard Optoelectronic's ROCE

In summary, it's unfortunate that Leyard Optoelectronic is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 44% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to continue researching Leyard Optoelectronic, you might be interested to know about the 3 warning signs that our analysis has discovered.

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.