If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So on that note, Vanchip (Tianjin) Technology (SHSE:688153) looks quite promising in regards to its trends of return on capital.
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 Vanchip (Tianjin) Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.033 = CN¥129m ÷ (CN¥4.8b - CN¥826m) (Based on the trailing twelve months to December 2023).
Therefore, Vanchip (Tianjin) Technology has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 5.2%.
In the above chart we have measured Vanchip (Tianjin) Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Vanchip (Tianjin) Technology .
What Does the ROCE Trend For Vanchip (Tianjin) Technology Tell Us?
The fact that Vanchip (Tianjin) Technology is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 3.3% on its capital. Not only that, but the company is utilizing 2,326% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
One more thing to note, Vanchip (Tianjin) Technology has decreased current liabilities to 17% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
The Key Takeaway
To the delight of most shareholders, Vanchip (Tianjin) Technology has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 26% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you'd like to know about the risks facing Vanchip (Tianjin) Technology, we've discovered 1 warning sign that you should be aware of.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.