If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Leaguer (Shenzhen) Microelectronics (SHSE:688589) 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)?

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 Leaguer (Shenzhen) Microelectronics:

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

0.038 = CN¥51m ÷ (CN¥1.4b - CN¥121m) (Based on the trailing twelve months to September 2024).

Therefore, Leaguer (Shenzhen) Microelectronics has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 4.9%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Leaguer (Shenzhen) Microelectronics' past further, check out this free graph covering Leaguer (Shenzhen) Microelectronics' past earnings, revenue and cash flow.

What Can We Tell From Leaguer (Shenzhen) Microelectronics' ROCE Trend?

In terms of Leaguer (Shenzhen) Microelectronics' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 15% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Leaguer (Shenzhen) Microelectronics has done well to pay down its current liabilities to 8.4% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Leaguer (Shenzhen) Microelectronics' ROCE

We're a bit apprehensive about Leaguer (Shenzhen) Microelectronics because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 44% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing to note, we've identified 2 warning signs with Leaguer (Shenzhen) Microelectronics and understanding these should be part of your investment process.

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.