Returns On Capital At Hangzhou Prevail Optoelectronic Equipment (SZSE:300710) Have Stalled

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Hangzhou Prevail Optoelectronic Equipment (SZSE:300710), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Hangzhou Prevail Optoelectronic Equipment:

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

0.028 = CN¥20m ÷ (CN¥880m - CN¥181m) (Based on the trailing twelve months to September 2024).

So, Hangzhou Prevail Optoelectronic Equipment has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 4.1%.

Check out our latest analysis for Hangzhou Prevail Optoelectronic Equipment

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hangzhou Prevail Optoelectronic Equipment's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hangzhou Prevail Optoelectronic Equipment.

What Can We Tell From Hangzhou Prevail Optoelectronic Equipment's ROCE Trend?

There hasn't been much to report for Hangzhou Prevail Optoelectronic Equipment's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Hangzhou Prevail Optoelectronic Equipment to be a multi-bagger going forward.

On a side note, Hangzhou Prevail Optoelectronic Equipment has done well to reduce current liabilities to 21% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Hangzhou Prevail Optoelectronic Equipment's ROCE

We can conclude that in regards to Hangzhou Prevail Optoelectronic Equipment's returns on capital employed and the trends, there isn't much change to report on. Unsurprisingly then, the total return to shareholders over the last five years has been flat. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know more about Hangzhou Prevail Optoelectronic Equipment, we've spotted 2 warning signs, and 1 of them is concerning.

While Hangzhou Prevail Optoelectronic Equipment isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.