If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Having said that, from a first glance at Changsha Jingjia Microelectronics (SZSE:300474) 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)?
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 Changsha Jingjia Microelectronics:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.00069 = CN¥2.5m ÷ (CN¥4.2b - CN¥638m) (Based on the trailing twelve months to September 2023).
So, Changsha Jingjia Microelectronics has an ROCE of 0.07%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 4.5%.
Above you can see how the current ROCE for Changsha Jingjia Microelectronics 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 Changsha Jingjia Microelectronics for free.
The Trend Of ROCE
The trend of ROCE doesn't look fantastic because it's fallen from 11% five years ago, while the business's capital employed increased by 225%. That being said, Changsha Jingjia Microelectronics raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Changsha Jingjia Microelectronics might not have received a full period of earnings contribution from it.
In Conclusion...
From the above analysis, we find it rather worrisome that returns on capital and sales for Changsha Jingjia Microelectronics have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 98% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
Changsha Jingjia Microelectronics does have some risks though, and we've spotted 2 warning signs for Changsha Jingjia Microelectronics that you might be interested in.
While Changsha Jingjia Microelectronics 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.