Returns On Capital Signal Tricky Times Ahead For DongGuan YuTong Optical TechnologyLtd (SZSE:300790)

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at DongGuan YuTong Optical TechnologyLtd (SZSE:300790) and its ROCE trend, we weren't exactly thrilled.

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

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. Analysts use this formula to calculate it for DongGuan YuTong Optical TechnologyLtd:

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%. On its own that's a low return, but compared to the average of 5.8% generated by the Electronic industry, it's much better.

View our latest analysis for DongGuan YuTong Optical TechnologyLtd

In the above chart we have measured DongGuan YuTong Optical TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for DongGuan YuTong Optical TechnologyLtd .

What Does the ROCE Trend For DongGuan YuTong Optical TechnologyLtd Tell Us?

The trend of ROCE doesn't look fantastic because it's fallen from 11% five years ago, while the business's capital employed increased by 137%. That being said, DongGuan YuTong Optical TechnologyLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. 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.

On a side note, DongGuan YuTong Optical TechnologyLtd's current liabilities are still rather high at 43% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

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. Furthermore the stock has climbed 95% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching DongGuan YuTong Optical TechnologyLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.