Jilin Sino-Microelectronics (SHSE:600360) Shareholders Will Want The ROCE Trajectory To Continue

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Jilin Sino-Microelectronics (SHSE:600360) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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 Jilin Sino-Microelectronics, this is the formula:

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

0.048 = CN¥183m ÷ (CN¥6.6b - CN¥2.8b) (Based on the trailing twelve months to September 2024).

Therefore, Jilin Sino-Microelectronics has an ROCE of 4.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.9%.

Check out our latest analysis for Jilin Sino-Microelectronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jilin Sino-Microelectronics' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jilin Sino-Microelectronics.

How Are Returns Trending?

While there are companies with higher returns on capital out there, we still find the trend at Jilin Sino-Microelectronics promising. The figures show that over the last five years, ROCE has grown 23% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a side note, Jilin Sino-Microelectronics' current liabilities are still rather high at 42% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Jilin Sino-Microelectronics' ROCE

In summary, we're delighted to see that Jilin Sino-Microelectronics has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 29% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 1 warning sign facing Jilin Sino-Microelectronics that you might find interesting.

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.