Shenzhen Absen OptoelectronicLtd's (SZSE:300389) Returns Have Hit A Wall

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Shenzhen Absen OptoelectronicLtd (SZSE:300389) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. Analysts use this formula to calculate it for Shenzhen Absen OptoelectronicLtd:

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

0.13 = CN¥196m ÷ (CN¥3.7b - CN¥2.2b) (Based on the trailing twelve months to June 2024).

So, Shenzhen Absen OptoelectronicLtd has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 5.4% generated by the Electronic industry.

View our latest analysis for Shenzhen Absen OptoelectronicLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Absen OptoelectronicLtd's ROCE against it's prior returns. If you'd like to look at how Shenzhen Absen OptoelectronicLtd has performed in the past in other metrics, you can view this free graph of Shenzhen Absen OptoelectronicLtd's past earnings, revenue and cash flow.

So How Is Shenzhen Absen OptoelectronicLtd's ROCE Trending?

There hasn't been much to report for Shenzhen Absen OptoelectronicLtd's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Shenzhen Absen OptoelectronicLtd in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 59% of total assets, this reported ROCE would probably be less than13% because total capital employed would be higher.The 13% ROCE could be even lower if current liabilities weren't 59% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

Our Take On Shenzhen Absen OptoelectronicLtd's ROCE

We can conclude that in regards to Shenzhen Absen OptoelectronicLtd's returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 8.8% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Shenzhen Absen OptoelectronicLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

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.