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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Union Semiconductor (Hefei) (SHSE:688403) looks quite promising in regards to its trends of return on capital.

Understanding 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. 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)

0.043 = CN¥138m ÷ (CN¥3.8b - CN¥626m) (Based on the trailing twelve months to June 2024).

So, Union Semiconductor (Hefei) has an ROCE of 4.3%. Even though it's in line with the industry average of 4.3%, it's still a low return by itself.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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.

So How Is Union Semiconductor (Hefei)'s ROCE Trending?

The fact that Union Semiconductor (Hefei) is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 4.3% on its capital. In addition to that, Union Semiconductor (Hefei) is employing 593% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Union Semiconductor (Hefei) has decreased current liabilities to 16% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

In summary, it's great to see that Union Semiconductor (Hefei) has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 27% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we found 2 warning signs for Union Semiconductor (Hefei) (1 is a bit concerning) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.