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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Shenzhen JPT Opto-Electronics (SHSE:688025), it didn't seem to tick all of these boxes.
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 Shenzhen JPT Opto-Electronics:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = CN¥54m ÷ (CN¥2.5b - CN¥563m) (Based on the trailing twelve months to September 2022).
So, Shenzhen JPT Opto-Electronics has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 6.9%.
See our latest analysis for Shenzhen JPT Opto-Electronics
In the above chart we have measured Shenzhen JPT Opto-Electronics' 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 report for Shenzhen JPT Opto-Electronics.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Shenzhen JPT Opto-Electronics, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.8% from 25% five years ago. However it looks like Shenzhen JPT Opto-Electronics 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a side note, Shenzhen JPT Opto-Electronics has done well to pay down its current liabilities to 23% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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...
To conclude, we've found that Shenzhen JPT Opto-Electronics is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 18% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
Shenzhen JPT Opto-Electronics does have some risks though, and we've spotted 3 warning signs for Shenzhen JPT Opto-Electronics that you might be interested in.
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.