Investors Could Be Concerned With Union OptechLtd's (SZSE:300691) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Union OptechLtd (SZSE:300691) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Union OptechLtd, this is the formula:

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

0.018 = CN¥37m ÷ (CN¥2.6b - CN¥561m) (Based on the trailing twelve months to March 2024).

Therefore, Union OptechLtd has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.2%.

See our latest analysis for Union OptechLtd

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'd like to look at how Union OptechLtd has performed in the past in other metrics, you can view this free graph of Union OptechLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Union OptechLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.8% from 8.1% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Union OptechLtd has decreased its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Union OptechLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Union OptechLtd's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 5.6% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know more about Union OptechLtd, we've spotted 5 warning signs, and 1 of them can't be ignored.

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.