What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 when we looked at Eoptolink Technology (SZSE:300502) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Eoptolink Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.093 = CN¥496m ÷ (CN¥6.1b - CN¥769m) (Based on the trailing twelve months to September 2023).
Thus, Eoptolink Technology has an ROCE of 9.3%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.0%.
View our latest analysis for Eoptolink Technology
In the above chart we have measured Eoptolink Technology's 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 Eoptolink Technology.
What Does the ROCE Trend For Eoptolink Technology Tell Us?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 9.3%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 386%. So we're very much inspired by what we're seeing at Eoptolink Technology thanks to its ability to profitably reinvest capital.
The Bottom Line
All in all, it's terrific to see that Eoptolink Technology is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Eoptolink Technology can keep these trends up, it could have a bright future ahead.
One final note, you should learn about the 2 warning signs we've spotted with Eoptolink Technology (including 1 which shouldn't be ignored) .
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.