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 Leaguer (Shenzhen) Microelectronics (SHSE:688589), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Leaguer (Shenzhen) Microelectronics:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.076 = CN¥96m ÷ (CN¥1.4b - CN¥153m) (Based on the trailing twelve months to September 2023).
Thus, Leaguer (Shenzhen) Microelectronics has an ROCE of 7.6%. On its own that's a low return, but compared to the average of 4.2% generated by the Semiconductor industry, it's much better.
Check out our latest analysis for Leaguer (Shenzhen) Microelectronics
In the above chart we have measured Leaguer (Shenzhen) Microelectronics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Leaguer (Shenzhen) Microelectronics here for free.
So How Is Leaguer (Shenzhen) Microelectronics' ROCE Trending?
The returns on capital haven't changed much for Leaguer (Shenzhen) Microelectronics in recent years. Over the past five years, ROCE has remained relatively flat at around 7.6% and the business has deployed 480% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
On a side note, Leaguer (Shenzhen) Microelectronics has done well to reduce current liabilities to 11% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
The Bottom Line
Long story short, while Leaguer (Shenzhen) Microelectronics has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 20% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
If you want to continue researching Leaguer (Shenzhen) Microelectronics, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.