Here's What's Concerning About Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's (SZSE:301421) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Nanjing Wavelength Opto-Electronic Science & TechnologyLtd (SZSE:301421), we don't think it's current trends fit the mold of a multi-bagger.

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 Nanjing Wavelength Opto-Electronic Science & TechnologyLtd is:

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

0.034 = CN¥40m ÷ (CN¥1.3b - CN¥148m) (Based on the trailing twelve months to June 2024).

So, Nanjing Wavelength Opto-Electronic Science & TechnologyLtd has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.4%.

View our latest analysis for Nanjing Wavelength Opto-Electronic Science & TechnologyLtd

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Nanjing Wavelength Opto-Electronic Science & TechnologyLtd.

What Can We Tell From Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's ROCE Trend?

In terms of Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 14%, but since then they've fallen to 3.4%. However it looks like Nanjing Wavelength Opto-Electronic Science & TechnologyLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 33% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Nanjing Wavelength Opto-Electronic Science & TechnologyLtd has the makings of a multi-bagger.

Nanjing Wavelength Opto-Electronic Science & TechnologyLtd does have some risks though, and we've spotted 2 warning signs for Nanjing Wavelength Opto-Electronic Science & TechnologyLtd that you might be interested in.

While Nanjing Wavelength Opto-Electronic Science & 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.