What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Shaanxi Lighte Optoelectronics MaterialLtd's (SHSE:688150) returns on capital, so let's have a look.

Understanding 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 Shaanxi Lighte Optoelectronics MaterialLtd is:

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

0.038 = CN¥73m ÷ (CN¥2.0b - CN¥104m) (Based on the trailing twelve months to March 2024).

Thus, Shaanxi Lighte Optoelectronics MaterialLtd has an ROCE of 3.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.2%.

Above you can see how the current ROCE for Shaanxi Lighte Optoelectronics MaterialLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shaanxi Lighte Optoelectronics MaterialLtd for free.

What Can We Tell From Shaanxi Lighte Optoelectronics MaterialLtd's ROCE Trend?

Shaanxi Lighte Optoelectronics MaterialLtd has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 3.8% on its capital. Not only that, but the company is utilizing 387% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 5.2%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Shaanxi Lighte Optoelectronics MaterialLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

Long story short, we're delighted to see that Shaanxi Lighte Optoelectronics MaterialLtd's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 10% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to continue researching Shaanxi Lighte Optoelectronics MaterialLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.