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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at ArcSoft (SHSE:688088) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 ArcSoft:

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

0.039 = CN¥107m ÷ (CN¥3.0b - CN¥319m) (Based on the trailing twelve months to March 2024).

Thus, ArcSoft has an ROCE of 3.9%. In absolute terms, that's a low return, but it's much better than the Software industry average of 3.0%.

Above you can see how the current ROCE for ArcSoft compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for ArcSoft .

What Can We Tell From ArcSoft's ROCE Trend?

In terms of ArcSoft's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.9% from 17% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for ArcSoft. And there could be an opportunity here if other metrics look good too, because the stock has declined 34% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you're still interested in ArcSoft it's worth checking out our FREE intrinsic value approximation for 688088 to see if it's trading at an attractive price in other respects.

While ArcSoft may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.