The Return Trends At Hangzhou Silan MicroelectronicsLtd (SHSE:600460) Look Promising

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 when we looked at Hangzhou Silan MicroelectronicsLtd (SHSE:600460) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Hangzhou Silan MicroelectronicsLtd:

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

0.031 = CN¥559m ÷ (CN¥23b - CN¥5.2b) (Based on the trailing twelve months to March 2024).

Thus, Hangzhou Silan MicroelectronicsLtd has an ROCE of 3.1%. In absolute terms, that's a low return but it's around the Semiconductor industry average of 3.9%.

See our latest analysis for Hangzhou Silan MicroelectronicsLtd

In the above chart we have measured Hangzhou Silan MicroelectronicsLtd'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 Hangzhou Silan MicroelectronicsLtd for free.

What Does the ROCE Trend For Hangzhou Silan MicroelectronicsLtd Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 3.1%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 230%. So we're very much inspired by what we're seeing at Hangzhou Silan MicroelectronicsLtd thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 22%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Hangzhou Silan MicroelectronicsLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

To sum it up, Hangzhou Silan MicroelectronicsLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 6.8% to shareholders. So with that in mind, we think the stock deserves further research.

On a separate note, we've found 1 warning sign for Hangzhou Silan MicroelectronicsLtd you'll probably want to know about.

While Hangzhou Silan MicroelectronicsLtd 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.

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.