Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. And in light of that, the trends we're seeing at Unigroup Guoxin Microelectronics' (SZSE:002049) look very promising so lets take a look.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Unigroup Guoxin Microelectronics is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = CN¥2.7b ÷ (CN¥17b - CN¥4.2b) (Based on the trailing twelve months to September 2023).
Thus, Unigroup Guoxin Microelectronics has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 5.3% earned by companies in a similar industry.
In the above chart we have measured Unigroup Guoxin Microelectronics' 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 Unigroup Guoxin Microelectronics for free.
So How Is Unigroup Guoxin Microelectronics' ROCE Trending?
The trends we've noticed at Unigroup Guoxin Microelectronics are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 187% more capital is being employed now too. So we're very much inspired by what we're seeing at Unigroup Guoxin Microelectronics thanks to its ability to profitably reinvest capital.
In Conclusion...
In summary, it's great to see that Unigroup Guoxin Microelectronics can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 91% return over the last five years. In light of that, we think it's worth looking further into this stock because if Unigroup Guoxin Microelectronics can keep these trends up, it could have a bright future ahead.
While Unigroup Guoxin Microelectronics looks impressive, no company is worth an infinite price. The intrinsic value infographic for 002049 helps visualize whether it is currently trading for a fair price.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.