If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at GRINM Semiconductor Materials (SHSE:688432) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for GRINM Semiconductor Materials, this is the formula:

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

0.055 = CN¥263m ÷ (CN¥5.0b - CN¥215m) (Based on the trailing twelve months to September 2023).

Therefore, GRINM Semiconductor Materials has an ROCE of 5.5%. 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 GRINM Semiconductor Materials

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 here for free.

What The Trend Of ROCE Can Tell Us

In terms of GRINM Semiconductor Materials' historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 9.9%, but since then they've fallen to 5.5%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, GRINM Semiconductor Materials has decreased its current liabilities to 4.3% of total assets. That could partly explain why the ROCE has dropped. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On GRINM Semiconductor Materials' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for GRINM Semiconductor Materials have fallen, meanwhile the business is employing more capital than it was four years ago. It should come as no surprise then that the stock has fallen 15% over the last year, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 1 warning sign with GRINM Semiconductor Materials and understanding it should be part of your investment process.

While GRINM Semiconductor Materials 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.