If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Chengdu Screen Micro-electronicsLTD (SHSE:688053) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Chengdu Screen Micro-electronicsLTD:

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

0.021 = CN¥38m ÷ (CN¥1.8b - CN¥47m) (Based on the trailing twelve months to September 2023).

So, Chengdu Screen Micro-electronicsLTD has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.0%.

View our latest analysis for Chengdu Screen Micro-electronicsLTD

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chengdu Screen Micro-electronicsLTD's ROCE against it's prior returns. If you're interested in investigating Chengdu Screen Micro-electronicsLTD's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Chengdu Screen Micro-electronicsLTD's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 2.1% from 32% four years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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, Chengdu Screen Micro-electronicsLTD has done well to pay down its current liabilities to 2.6% 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

From the above analysis, we find it rather worrisome that returns on capital and sales for Chengdu Screen Micro-electronicsLTD have fallen, meanwhile the business is employing more capital than it was four years ago. Investors haven't taken kindly to these developments, since the stock has declined 33% from where it was year ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Chengdu Screen Micro-electronicsLTD does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Chengdu Screen Micro-electronicsLTD isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.