To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Anji Microelectronics Technology (Shanghai) (SHSE:688019) 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. The formula for this calculation on Anji Microelectronics Technology (Shanghai) is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CN¥329m ÷ (CN¥2.4b - CN¥171m) (Based on the trailing twelve months to September 2023).
Therefore, Anji Microelectronics Technology (Shanghai) has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 4.2% generated by the Semiconductor industry.
See our latest analysis for Anji Microelectronics Technology (Shanghai)
In the above chart we have measured Anji Microelectronics Technology (Shanghai)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Anji Microelectronics Technology (Shanghai) here for free.
What Can We Tell From Anji Microelectronics Technology (Shanghai)'s ROCE Trend?
Investors would be pleased with what's happening at Anji Microelectronics Technology (Shanghai). The data shows that returns on capital have increased substantially over the last five years to 15%. 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 547%. So we're very much inspired by what we're seeing at Anji Microelectronics Technology (Shanghai) thanks to its ability to profitably reinvest capital.
The Bottom Line
All in all, it's terrific to see that Anji Microelectronics Technology (Shanghai) is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 22% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.
One more thing: We've identified 2 warning signs with Anji Microelectronics Technology (Shanghai) (at least 1 which is a bit concerning) , and understanding them would certainly be useful.
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.