To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Suzhou Oriental Semiconductor (SHSE:688261) looks quite promising in regards to its trends of return on capital.
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. To calculate this metric for Suzhou Oriental Semiconductor, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = CN¥177m ÷ (CN¥3.0b - CN¥134m) (Based on the trailing twelve months to September 2023).
Thus, Suzhou Oriental Semiconductor has an ROCE of 6.1%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 4.2%.
View our latest analysis for Suzhou Oriental Semiconductor
Above you can see how the current ROCE for Suzhou Oriental Semiconductor 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 Suzhou Oriental Semiconductor here for free.
What Does the ROCE Trend For Suzhou Oriental Semiconductor Tell Us?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last four years to 6.1%. 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 1,675%. So we're very much inspired by what we're seeing at Suzhou Oriental Semiconductor thanks to its ability to profitably reinvest capital.
The Bottom Line
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 Suzhou Oriental Semiconductor has. Astute investors may have an opportunity here because the stock has declined 59% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.
On a final note, we found 3 warning signs for Suzhou Oriental Semiconductor (1 is a bit unpleasant) you should be aware of.
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.
