Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 briefly looking over the numbers, we don't think Amlogic (Shanghai)Ltd (SHSE:688099) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Amlogic (Shanghai)Ltd is:

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

0.079 = CN¥473m ÷ (CN¥7.1b - CN¥1.1b) (Based on the trailing twelve months to June 2024).

Therefore, Amlogic (Shanghai)Ltd has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 4.8% generated by the Semiconductor industry, it's much better.

In the above chart we have measured Amlogic (Shanghai)Ltd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Amlogic (Shanghai)Ltd for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Amlogic (Shanghai)Ltd doesn't inspire confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 7.9%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Amlogic (Shanghai)Ltd's ROCE

While returns have fallen for Amlogic (Shanghai)Ltd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 40% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a separate note, we've found 1 warning sign for Amlogic (Shanghai)Ltd you'll probably want to know about.

While Amlogic (Shanghai)Ltd 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.