Returns On Capital Are Showing Encouraging Signs At Advanced Micro-Fabrication Equipment China (SHSE:688012)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Advanced Micro-Fabrication Equipment China (SHSE:688012) so let's look a bit deeper.

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

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)

0.065 = CN¥1.1b ÷ (CN¥21b - CN¥3.3b) (Based on the trailing twelve months to September 2023).

So, Advanced Micro-Fabrication Equipment China has an ROCE of 6.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.8%.

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

Above you can see how the current ROCE for Advanced Micro-Fabrication Equipment China compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Advanced Micro-Fabrication Equipment China .

The Trend Of ROCE

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 870% more capital is being employed now too. So we're very much inspired by what we're seeing at Advanced Micro-Fabrication Equipment China thanks to its ability to profitably reinvest capital.

One more thing to note, Advanced Micro-Fabrication Equipment China has decreased current liabilities to 16% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From Advanced Micro-Fabrication Equipment China's ROCE

In summary, it's great to see that Advanced Micro-Fabrication Equipment China can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Investors may not be impressed by the favorable underlying trends yet because over the last three years the stock has only returned 7.6% to shareholders. So with that in mind, we think the stock deserves further research.

If you'd like to know about the risks facing Advanced Micro-Fabrication Equipment China, we've discovered 1 warning sign that you should be aware of.

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.