What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So on that note, Shanghai Fullhan Microelectronics (SZSE:300613) looks quite promising in regards to its trends of return on capital.

What Is 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. Analysts use this formula to calculate it for Shanghai Fullhan Microelectronics:

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

0.064 = CN¥208m ÷ (CN¥3.6b - CN¥300m) (Based on the trailing twelve months to September 2023).

Thus, Shanghai Fullhan Microelectronics has an ROCE of 6.4%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 4.7%.

Above you can see how the current ROCE for Shanghai Fullhan Microelectronics 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 Shanghai Fullhan Microelectronics here for free.

What The Trend Of ROCE Can Tell Us

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 6.4%. Basically the business is earning more per dollar of capital invested and in addition to that, 217% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Shanghai Fullhan Microelectronics' ROCE

All in all, it's terrific to see that Shanghai Fullhan Microelectronics is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 71% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Shanghai Fullhan Microelectronics can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing Shanghai Fullhan Microelectronics that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.