Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Chipsea Technologies (shenzhen) (SHSE:688595), we don't think it's current trends fit the mold of a multi-bagger.
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. Analysts use this formula to calculate it for Chipsea Technologies (shenzhen):
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.078 = CN¥81m ÷ (CN¥1.1b - CN¥95m) (Based on the trailing twelve months to March 2022).
Therefore, Chipsea Technologies (shenzhen) has an ROCE of 7.8%. In absolute terms, that's a low return but it's around the Semiconductor industry average of 8.6%.
View our latest analysis for Chipsea Technologies (shenzhen)
SHSE:688595 Return on Capital Employed July 26th 2022Above you can see how the current ROCE for Chipsea Technologies (shenzhen) 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 Chipsea Technologies (shenzhen) here for free.
The Trend Of ROCE
In terms of Chipsea Technologies (shenzhen)'s historical ROCE trend, it doesn't exactly demand attention. The company has employed 654% more capital in the last five years, and the returns on that capital have remained stable at 7.8%. 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.
On a side note, Chipsea Technologies (shenzhen) has done well to reduce current liabilities to 8.4% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.
The Bottom Line
In conclusion, Chipsea Technologies (shenzhen) has been investing more capital into the business, but returns on that capital haven't increased. And in the last year, the stock has given away 48% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Chipsea Technologies (shenzhen) (of which 1 shouldn't be ignored!) that you should know about.
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.