There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Shenzhen China Micro Semicon (SHSE:688380) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is 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. To calculate this metric for Shenzhen China Micro Semicon, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0071 = CN¥21m ÷ (CN¥3.2b - CN¥162m) (Based on the trailing twelve months to March 2024).
Thus, Shenzhen China Micro Semicon has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 4.7%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen China Micro Semicon's ROCE against it's prior returns. If you're interested in investigating Shenzhen China Micro Semicon's past further, check out this free graph covering Shenzhen China Micro Semicon's past earnings, revenue and cash flow.
So How Is Shenzhen China Micro Semicon's ROCE Trending?
On the surface, the trend of ROCE at Shenzhen China Micro Semicon doesn't inspire confidence. To be more specific, ROCE has fallen from 21% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a related note, Shenzhen China Micro Semicon has decreased its current liabilities to 5.1% of total assets. So we could link some of this to the decrease in ROCE. 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 Shenzhen China Micro Semicon's ROCE
While returns have fallen for Shenzhen China Micro Semicon in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 47% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
Like most companies, Shenzhen China Micro Semicon does come with some risks, and we've found 2 warning signs that you should be aware of.
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.