Some Investors May Be Worried About Rockchip Electronics' (SHSE:603893) Returns On Capital

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Rockchip Electronics (SHSE:603893) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Rockchip Electronics, this is the formula:

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

0.046 = CN¥145m ÷ (CN¥3.5b - CN¥351m) (Based on the trailing twelve months to March 2024).

Thus, Rockchip Electronics has an ROCE of 4.6%. On its own, that's a low figure but it's around the 3.9% average generated by the Semiconductor industry.

Check out our latest analysis for Rockchip Electronics

Above you can see how the current ROCE for Rockchip Electronics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Rockchip Electronics for free.

What Can We Tell From Rockchip Electronics' ROCE Trend?

On the surface, the trend of ROCE at Rockchip Electronics doesn't inspire confidence. Around five years ago the returns on capital were 8.7%, but since then they've fallen to 4.6%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

While returns have fallen for Rockchip Electronics in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 61% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Rockchip Electronics could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 603893 on our platform quite valuable.

While Rockchip Electronics 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.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com