Returns On Capital At China Display Optoelectronics Technology Holdings (HKG:334) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 China Display Optoelectronics Technology Holdings (HKG:334) and its ROCE trend, we weren't exactly thrilled.

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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. 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)

0.0022 = CN¥2.4m ÷ (CN¥3.5b - CN¥2.4b) (Based on the trailing twelve months to December 2024).

So, China Display Optoelectronics Technology Holdings has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 7.8%.

View our latest analysis for China Display Optoelectronics Technology Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Display Optoelectronics Technology Holdings' ROCE against it's prior returns. 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 China Display Optoelectronics Technology Holdings' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at China Display Optoelectronics Technology Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 9.1%, but since then they've fallen to 0.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, China Display Optoelectronics Technology Holdings has a high ratio of current liabilities to total assets of 69%. 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 On China Display Optoelectronics Technology Holdings' ROCE

While returns have fallen for China Display Optoelectronics Technology Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 42% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about China Display Optoelectronics Technology Holdings, we've spotted 2 warning signs, and 1 of them can't be ignored.

While China Display Optoelectronics Technology Holdings 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.