Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Speaking of which, we noticed some great changes in Xiamen Changelight's (SZSE:300102) returns on capital, so let's have a look.

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. To calculate this metric for Xiamen Changelight, this is the formula:

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

0.012 = CN¥57m ÷ (CN¥6.4b - CN¥1.6b) (Based on the trailing twelve months to September 2024).

Thus, Xiamen Changelight has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 4.9%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Xiamen Changelight.

What Does the ROCE Trend For Xiamen Changelight Tell Us?

Shareholders will be relieved that Xiamen Changelight has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 1.2%, which is always encouraging. While returns have increased, the amount of capital employed by Xiamen Changelight has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

In Conclusion...

To sum it up, Xiamen Changelight is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 253% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know more about Xiamen Changelight, we've spotted 2 warning signs, and 1 of them is concerning.

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.