To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Advanced Micro-Fabrication Equipment China (SHSE:688012) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Advanced Micro-Fabrication Equipment China is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.065 = CN¥1.1b ÷ (CN¥21b - CN¥3.3b) (Based on the trailing twelve months to September 2023).
So, Advanced Micro-Fabrication Equipment China has an ROCE of 6.5%. On its own that's a low return, but compared to the average of 4.4% generated by the Semiconductor industry, it's much better.
Check out our latest analysis for Advanced Micro-Fabrication Equipment China
In the above chart we have measured Advanced Micro-Fabrication Equipment China's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Advanced Micro-Fabrication Equipment China.
What The Trend Of ROCE Can Tell Us
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 6.5%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 870%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 16%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
What We Can Learn From Advanced Micro-Fabrication Equipment China's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Advanced Micro-Fabrication Equipment China has. And given the stock has remained rather flat over the last three years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Like most companies, Advanced Micro-Fabrication Equipment China does come with some risks, and we've found 1 warning sign that you should be aware of.
While Advanced Micro-Fabrication Equipment China 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.
