Advanced Micro-Fabrication Equipment China's (SHSE:688012) Returns Have Hit A Wall

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Although, when we looked at Advanced Micro-Fabrication Equipment China (SHSE:688012), it didn't seem to tick all of these boxes.

What Is 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 Advanced Micro-Fabrication Equipment China, this is the formula:

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

0.067 = CN¥1.2b ÷ (CN¥22b - CN¥4.4b) (Based on the trailing twelve months to March 2024).

Thus, Advanced Micro-Fabrication Equipment China has an ROCE of 6.7%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 3.9%.

Check out our latest analysis for Advanced Micro-Fabrication Equipment China

In the above chart we have measured Advanced Micro-Fabrication Equipment China's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Advanced Micro-Fabrication Equipment China .

How Are Returns Trending?

The returns on capital haven't changed much for Advanced Micro-Fabrication Equipment China in recent years. Over the past five years, ROCE has remained relatively flat at around 6.7% and the business has deployed 717% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Advanced Micro-Fabrication Equipment China has done well to reduce current liabilities to 20% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On Advanced Micro-Fabrication Equipment China's ROCE

As we've seen above, Advanced Micro-Fabrication Equipment China's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 46% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing to note, we've identified 1 warning sign with Advanced Micro-Fabrication Equipment China and understanding it should be part of your investment process.

While Advanced Micro-Fabrication Equipment China 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.

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