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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. With that in mind, we've noticed some promising trends at Wuxi ETEK MicroelectronicsLtd (SHSE:688601) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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 Wuxi ETEK MicroelectronicsLtd:

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

0.15 = CN¥208m ÷ (CN¥1.5b - CN¥97m) (Based on the trailing twelve months to March 2024).

So, Wuxi ETEK MicroelectronicsLtd has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 4.5% it's much better.

In the above chart we have measured Wuxi ETEK MicroelectronicsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Wuxi ETEK MicroelectronicsLtd .

How Are Returns Trending?

The trends we've noticed at Wuxi ETEK MicroelectronicsLtd are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 15%. Basically the business is earning more per dollar of capital invested and in addition to that, 435% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

One more thing to note, Wuxi ETEK MicroelectronicsLtd has decreased current liabilities to 6.5% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Wuxi ETEK MicroelectronicsLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Wuxi ETEK MicroelectronicsLtd's ROCE

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 Wuxi ETEK MicroelectronicsLtd has. Astute investors may have an opportunity here because the stock has declined 62% in the last three years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a separate note, we've found 2 warning signs for Wuxi ETEK MicroelectronicsLtd you'll probably want to know about.

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.