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. Speaking of which, we noticed some great changes in Southchip Semiconductor Technology(Shanghai)'s (SHSE:688484) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Southchip Semiconductor Technology(Shanghai), this is the formula:

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

0.082 = CN¥317m ÷ (CN¥4.5b - CN¥642m) (Based on the trailing twelve months to June 2024).

So, Southchip Semiconductor Technology(Shanghai) has an ROCE of 8.2%. On its own that's a low return, but compared to the average of 4.3% generated by the Semiconductor industry, it's much better.

Above you can see how the current ROCE for Southchip Semiconductor Technology(Shanghai) compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Southchip Semiconductor Technology(Shanghai) .

What The Trend Of ROCE Can Tell Us

We're delighted to see that Southchip Semiconductor Technology(Shanghai) is reaping rewards from its investments and is now generating some pre-tax profits. About four years ago the company was generating losses but things have turned around because it's now earning 8.2% on its capital. In addition to that, Southchip Semiconductor Technology(Shanghai) is employing 1,620% 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.

The Key Takeaway

Long story short, we're delighted to see that Southchip Semiconductor Technology(Shanghai)'s reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 31% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Southchip Semiconductor Technology(Shanghai) (of which 1 is concerning!) that you should know about.

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.

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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.