What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Having said that, from a first glance at Guizhou Zhenhua Fengguang Semiconductor (SHSE:688439) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Guizhou Zhenhua Fengguang Semiconductor:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.11 = CN¥530m ÷ (CN¥5.2b - CN¥515m) (Based on the trailing twelve months to September 2023).

Therefore, Guizhou Zhenhua Fengguang Semiconductor has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 4.2% generated by the Semiconductor industry.

Check out our latest analysis for Guizhou Zhenhua Fengguang Semiconductor

Above you can see how the current ROCE for Guizhou Zhenhua Fengguang Semiconductor compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Guizhou Zhenhua Fengguang Semiconductor here for free.

What Can We Tell From Guizhou Zhenhua Fengguang Semiconductor's ROCE Trend?

On the surface, the trend of ROCE at Guizhou Zhenhua Fengguang Semiconductor doesn't inspire confidence. To be more specific, ROCE has fallen from 24% over the last four years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Guizhou Zhenhua Fengguang Semiconductor has decreased its current liabilities to 9.8% of total assets. That could partly explain why the ROCE has dropped. 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 Bottom Line On Guizhou Zhenhua Fengguang Semiconductor's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Guizhou Zhenhua Fengguang Semiconductor is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 30% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing, we've spotted 1 warning sign facing Guizhou Zhenhua Fengguang Semiconductor that you might find interesting.

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.