Returns On Capital Are Showing Encouraging Signs At China Display Optoelectronics Technology Holdings (HKG:334)

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, China Display Optoelectronics Technology Holdings (HKG:334) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for China Display Optoelectronics Technology Holdings:

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

0.047 = CN¥47m ÷ (CN¥2.6b - CN¥1.6b) (Based on the trailing twelve months to June 2023).

Thus, China Display Optoelectronics Technology Holdings has an ROCE of 4.7%. In absolute terms, that's a low return but it's around the Tech industry average of 4.4%.

Check out our latest analysis for China Display Optoelectronics Technology Holdings

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'd like to look at how China Display Optoelectronics Technology Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From China Display Optoelectronics Technology Holdings' ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 4.7%. The amount of capital employed has increased too, by 46%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, China Display Optoelectronics Technology Holdings' current liabilities are still rather high at 61% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

All in all, it's terrific to see that China Display Optoelectronics Technology Holdings is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 60% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

One final note, you should learn about the 3 warning signs we've spotted with China Display Optoelectronics Technology Holdings (including 1 which makes us a bit uncomfortable) .

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.