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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at Shanghai V-Test Semiconductor Tech (SHSE:688372) 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 Shanghai V-Test Semiconductor Tech:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = CN¥122m ÷ (CN¥3.4b - CN¥434m) (Based on the trailing twelve months to September 2023).
Therefore, Shanghai V-Test Semiconductor Tech has an ROCE of 4.1%. Even though it's in line with the industry average of 4.2%, it's still a low return by itself.
View our latest analysis for Shanghai V-Test Semiconductor Tech
In the above chart we have measured Shanghai V-Test Semiconductor Tech's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shanghai V-Test Semiconductor Tech.
What Does the ROCE Trend For Shanghai V-Test Semiconductor Tech Tell Us?
When we looked at the ROCE trend at Shanghai V-Test Semiconductor Tech, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 4.1% from 7.3% four years ago. However it looks like Shanghai V-Test Semiconductor Tech might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
On a related note, Shanghai V-Test Semiconductor Tech has decreased its current liabilities to 13% 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.
The Key Takeaway
In summary, Shanghai V-Test Semiconductor Tech is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last year, the stock has given away 28% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
Shanghai V-Test Semiconductor Tech does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.
While Shanghai V-Test Semiconductor Tech 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.