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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Amlogic (Shanghai)Ltd (SHSE:688099), we don't think it's current trends fit the mold of a multi-bagger.

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 Amlogic (Shanghai)Ltd:

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

0.079 = CN¥491m ÷ (CN¥7.0b - CN¥728m) (Based on the trailing twelve months to September 2024).

So, Amlogic (Shanghai)Ltd has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 4.8% generated by the Semiconductor industry, it's much better.

Above you can see how the current ROCE for Amlogic (Shanghai)Ltd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Amlogic (Shanghai)Ltd .

The Trend Of ROCE

The returns on capital haven't changed much for Amlogic (Shanghai)Ltd in recent years. The company has consistently earned 7.9% for the last five years, and the capital employed within the business has risen 122% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

As we've seen above, Amlogic (Shanghai)Ltd's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 26% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Amlogic (Shanghai)Ltd does have some risks though, and we've spotted 3 warning signs for Amlogic (Shanghai)Ltd that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.