DongGuan YuTong Optical TechnologyLtd (SZSE:300790) Could Be Struggling To Allocate Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think DongGuan YuTong Optical TechnologyLtd (SZSE:300790) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on DongGuan YuTong Optical TechnologyLtd is:

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

0.079 = CN¥230m ÷ (CN¥5.1b - CN¥2.2b) (Based on the trailing twelve months to September 2024).

Therefore, DongGuan YuTong Optical TechnologyLtd has an ROCE of 7.9%. 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 DongGuan YuTong Optical TechnologyLtd

Above you can see how the current ROCE for DongGuan YuTong Optical TechnologyLtd 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 DongGuan YuTong Optical TechnologyLtd .

How Are Returns Trending?

We weren't thrilled with the trend because DongGuan YuTong Optical TechnologyLtd's ROCE has reduced by 29% over the last five years, while the business employed 137% more capital. Usually this isn't ideal, but given DongGuan YuTong Optical TechnologyLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence DongGuan YuTong Optical TechnologyLtd might not have received a full period of earnings contribution from it.

Another thing to note, DongGuan YuTong Optical TechnologyLtd has a high ratio of current liabilities to total assets of 43%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

While returns have fallen for DongGuan YuTong Optical TechnologyLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 12% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you'd like to know more about DongGuan YuTong Optical TechnologyLtd, we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.

While DongGuan YuTong Optical TechnologyLtd 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.