Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. In light of that, when we looked at Hua Hong Semiconductor (HKG:1347) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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 Hua Hong Semiconductor:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = US$412m ÷ (US$10.0b - US$851m) (Based on the trailing twelve months to September 2023).
So, Hua Hong Semiconductor has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 12%.
Check out our latest analysis for Hua Hong Semiconductor
Above you can see how the current ROCE for Hua Hong Semiconductor compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Hua Hong Semiconductor's ROCE Trending?
We weren't thrilled with the trend because Hua Hong Semiconductor's ROCE has reduced by 42% over the last five years, while the business employed 299% more capital. That being said, Hua Hong Semiconductor raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hua Hong Semiconductor's earnings and if they change as a result from the capital raise.
The Key Takeaway
In summary, Hua Hong Semiconductor is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 5.1% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
One final note, you should learn about the 2 warning signs we've spotted with Hua Hong Semiconductor (including 1 which can't be ignored) .
While Hua Hong Semiconductor 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.