If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. 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 Union Semiconductor (Hefei) (SHSE:688403) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
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 Union Semiconductor (Hefei), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = CN¥198m ÷ (CN¥3.3b - CN¥142m) (Based on the trailing twelve months to December 2023).
Thus, Union Semiconductor (Hefei) has an ROCE of 6.4%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Union Semiconductor (Hefei)'s ROCE against it's prior returns. If you're interested in investigating Union Semiconductor (Hefei)'s past further, check out this free graph covering Union Semiconductor (Hefei)'s past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Union Semiconductor (Hefei) has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 6.4% on its capital. Not only that, but the company is utilizing 578% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 4.4%, 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.
The Bottom Line
Overall, Union Semiconductor (Hefei) gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 35% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
While Union Semiconductor (Hefei) looks impressive, no company is worth an infinite price. The intrinsic value infographic for 688403 helps visualize whether it is currently trading for a fair price.
While Union Semiconductor (Hefei) 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.
