Capital Allocation Trends At Espressif Systems (Shanghai) (SHSE:688018) Aren't Ideal

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at Espressif Systems (Shanghai) (SHSE:688018) and its ROCE trend, we weren't exactly thrilled.

What Is 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 Espressif Systems (Shanghai) is:

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

0.075 = CN¥153m ÷ (CN¥2.3b - CN¥263m) (Based on the trailing twelve months to June 2024).

So, Espressif Systems (Shanghai) has an ROCE of 7.5%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 4.3%.

See our latest analysis for Espressif Systems (Shanghai)

In the above chart we have measured Espressif Systems (Shanghai)'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 Espressif Systems (Shanghai) .

What Does the ROCE Trend For Espressif Systems (Shanghai) Tell Us?

In terms of Espressif Systems (Shanghai)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 31% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Espressif Systems (Shanghai)'s ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Espressif Systems (Shanghai) is reinvesting for growth and has higher sales as a result. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to continue researching Espressif Systems (Shanghai), you might be interested to know about the 2 warning signs that our analysis has discovered.

While Espressif Systems (Shanghai) 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.