Capital Allocation Trends At CETC Chips Technology (SHSE:600877) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at CETC Chips Technology (SHSE:600877) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on CETC Chips Technology is:

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

0.068 = CN¥168m ÷ (CN¥2.9b - CN¥411m) (Based on the trailing twelve months to September 2024).

Therefore, CETC Chips Technology has an ROCE of 6.8%. On its own that's a low return, but compared to the average of 5.4% generated by the Semiconductor industry, it's much better.

Check out our latest analysis for CETC Chips Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for CETC Chips Technology's ROCE against it's prior returns. If you're interested in investigating CETC Chips Technology's past further, check out this free graph covering CETC Chips Technology's past earnings, revenue and cash flow.

What Does the ROCE Trend For CETC Chips Technology Tell Us?

In terms of CETC Chips Technology's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 14%, but since then they've fallen to 6.8%. However it looks like CETC Chips Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, CETC Chips Technology has decreased its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by CETC Chips Technology's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 60% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you're still interested in CETC Chips Technology it's worth checking out our FREE intrinsic value approximation for 600877 to see if it's trading at an attractive price in other respects.

While CETC Chips Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.