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. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Wuxi Chipown Micro-electronics (SHSE:688508), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Wuxi Chipown Micro-electronics is:

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

0.018 = CN¥46m ÷ (CN¥2.8b - CN¥309m) (Based on the trailing twelve months to December 2023).

Therefore, Wuxi Chipown Micro-electronics has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 5.5%.

In the above chart we have measured Wuxi Chipown Micro-electronics' 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 Wuxi Chipown Micro-electronics for free.

What Does the ROCE Trend For Wuxi Chipown Micro-electronics Tell Us?

The trend of ROCE doesn't look fantastic because it's fallen from 21% five years ago, while the business's capital employed increased by 922%. Usually this isn't ideal, but given Wuxi Chipown Micro-electronics conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Wuxi Chipown Micro-electronics might not have received a full period of earnings contribution from it.

Our Take On Wuxi Chipown Micro-electronics' ROCE

To conclude, we've found that Wuxi Chipown Micro-electronics is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 50% in the last three years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Like most companies, Wuxi Chipown Micro-electronics does come with some risks, and we've found 3 warning signs 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.

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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.