Talant Optronics (Suzhou) (SZSE:301045) May Have Issues Allocating Its 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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Talant Optronics (Suzhou) (SZSE:301045) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Talant Optronics (Suzhou) is:

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

0.0036 = CN¥3.9m ÷ (CN¥1.3b - CN¥202m) (Based on the trailing twelve months to June 2024).

So, Talant Optronics (Suzhou) has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.4%.

Check out our latest analysis for Talant Optronics (Suzhou)

In the above chart we have measured Talant Optronics (Suzhou)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Talant Optronics (Suzhou) for free.

What Can We Tell From Talant Optronics (Suzhou)'s ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 34% five years ago, while the business's capital employed increased by 381%. Usually this isn't ideal, but given Talant Optronics (Suzhou) 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 Talant Optronics (Suzhou) might not have received a full period of earnings contribution from it.

On a side note, Talant Optronics (Suzhou) has done well to pay down its current liabilities to 16% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Talant Optronics (Suzhou) is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 40% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Talant Optronics (Suzhou) does come with some risks, and we've found 3 warning signs that you should be aware of.

While Talant Optronics (Suzhou) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.