Investors Will Want Lens Technology's (SZSE:300433) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Lens Technology's (SZSE:300433) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Lens Technology, this is the formula:

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

0.067 = CN¥3.8b ÷ (CN¥81b - CN¥24b) (Based on the trailing twelve months to September 2024).

Therefore, Lens Technology has an ROCE of 6.7%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.5%.

View our latest analysis for Lens Technology

Above you can see how the current ROCE for Lens Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Lens Technology .

What Can We Tell From Lens Technology's ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 6.7%. Basically the business is earning more per dollar of capital invested and in addition to that, 120% more capital is being employed now too. So we're very much inspired by what we're seeing at Lens Technology thanks to its ability to profitably reinvest capital.

One more thing to note, Lens Technology has decreased current liabilities to 30% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Lens Technology has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Lens Technology's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Lens Technology has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 65% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 1 warning sign facing Lens Technology that you might find interesting.

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.