If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think GRINM Semiconductor Materials (SHSE:688432) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. The formula for this calculation on GRINM Semiconductor Materials is:

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

0.034 = CN¥163m ÷ (CN¥5.0b - CN¥205m) (Based on the trailing twelve months to March 2024).

Therefore, GRINM Semiconductor Materials has an ROCE of 3.4%. In absolute terms, that's a low return but it's around the Semiconductor industry average of 3.9%.

Above you can see how the current ROCE for GRINM Semiconductor Materials 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 GRINM Semiconductor Materials for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at GRINM Semiconductor Materials, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 3.4%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, GRINM Semiconductor Materials has decreased its current liabilities to 4.1% of total assets. So we could link some of this to the decrease in ROCE. 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 GRINM Semiconductor Materials' ROCE

In summary, we're somewhat concerned by GRINM Semiconductor Materials' diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 33% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

GRINM Semiconductor Materials does have some risks though, and we've spotted 1 warning sign for GRINM Semiconductor Materials that you might be interested in.

While GRINM Semiconductor Materials 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com