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. 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. So on that note, Union Semiconductor (Hefei) (SHSE:688403) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
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 Union Semiconductor (Hefei):
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = CN¥164m ÷ (CN¥3.7b - CN¥468m) (Based on the trailing twelve months to March 2024).
So, Union Semiconductor (Hefei) has an ROCE of 5.1%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 3.9%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Union Semiconductor (Hefei)'s ROCE against it's prior returns. If you're interested in investigating Union Semiconductor (Hefei)'s past further, check out this free graph covering Union Semiconductor (Hefei)'s past earnings, revenue and cash flow.
How Are Returns Trending?
The fact that Union Semiconductor (Hefei) is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 5.1% on its capital. Not only that, but the company is utilizing 590% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
One more thing to note, Union Semiconductor (Hefei) has decreased current liabilities to 13% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
What We Can Learn From Union Semiconductor (Hefei)'s ROCE
In summary, it's great to see that Union Semiconductor (Hefei) has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 30% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
On a final note, we found 2 warning signs for Union Semiconductor (Hefei) (1 is significant) you should be aware of.
While Union Semiconductor (Hefei) 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.
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