If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating ACM Research (Shanghai) (SHSE:688082), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 ACM Research (Shanghai):

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

0.11 = CN¥767m ÷ (CN¥10b - CN¥3.1b) (Based on the trailing twelve months to March 2024).

Therefore, ACM Research (Shanghai) has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 3.9% it's much better.

Above you can see how the current ROCE for ACM Research (Shanghai) 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 ACM Research (Shanghai) for free.

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 24% five years ago, while capital employed has grown 1,755%. That being said, ACM Research (Shanghai) raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence ACM Research (Shanghai) might not have received a full period of earnings contribution from it. Additionally, we found that ACM Research (Shanghai)'s most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.

On a related note, ACM Research (Shanghai) has decreased its current liabilities to 30% 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 ACM Research (Shanghai)'s ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for ACM Research (Shanghai). These growth trends haven't led to growth returns though, since the stock has fallen 34% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 2 warning signs with ACM Research (Shanghai) (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

While ACM Research (Shanghai) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.