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. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Shenzhen Jufei Optoelectronics (SZSE:300303) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Shenzhen Jufei Optoelectronics is:

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

0.061 = CN¥213m ÷ (CN¥5.2b - CN¥1.7b) (Based on the trailing twelve months to September 2023).

So, Shenzhen Jufei Optoelectronics has an ROCE of 6.1%. On its own that's a low return, but compared to the average of 4.4% generated by the Semiconductor industry, it's much better.

View our latest analysis for Shenzhen Jufei Optoelectronics

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Shenzhen Jufei Optoelectronics' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Shenzhen Jufei Optoelectronics' ROCE Trend?

There are better returns on capital out there than what we're seeing at Shenzhen Jufei Optoelectronics. The company has consistently earned 6.1% for the last five years, and the capital employed within the business has risen 74% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

In summary, Shenzhen Jufei Optoelectronics has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 135% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Shenzhen Jufei Optoelectronics does come with some risks, and we've found 1 warning sign that you should be aware of.

While Shenzhen Jufei Optoelectronics 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.