What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Having said that, from a first glance at Zhejiang Lante Optics (SHSE:688127) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Zhejiang Lante Optics is:

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

0.06 = CN¥95m ÷ (CN¥1.7b - CN¥101m) (Based on the trailing twelve months to March 2022).

Therefore, Zhejiang Lante Optics has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.9%.

Check out our latest analysis for Zhejiang Lante Optics

Above you can see how the current ROCE for Zhejiang Lante Optics 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 Zhejiang Lante Optics here for free.

So How Is Zhejiang Lante Optics' ROCE Trending?

When we looked at the ROCE trend at Zhejiang Lante Optics, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.0% from 22% five years ago. However it looks like Zhejiang Lante Optics 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.

On a related note, Zhejiang Lante Optics has decreased its current liabilities to 6.0% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Zhejiang Lante Optics' ROCE

In summary, Zhejiang Lante Optics is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last year, the stock has given away 11% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Zhejiang Lante Optics does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Zhejiang Lante Optics may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.