Amlogic (Shanghai)Ltd (SHSE:688099) Hasn't Managed To Accelerate Its Returns

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Amlogic (Shanghai)Ltd (SHSE:688099), it didn't seem to tick all of these boxes.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Amlogic (Shanghai)Ltd, this is the formula:

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

0.079 = CN¥491m ÷ (CN¥7.0b - CN¥728m) (Based on the trailing twelve months to September 2024).

Thus, Amlogic (Shanghai)Ltd has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 4.8% generated by the Semiconductor industry, it's much better.

Check out our latest analysis for Amlogic (Shanghai)Ltd

In the above chart we have measured Amlogic (Shanghai)Ltd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Amlogic (Shanghai)Ltd .

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Amlogic (Shanghai)Ltd in recent years. The company has consistently earned 7.9% for the last five years, and the capital employed within the business has risen 122% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Amlogic (Shanghai)Ltd's ROCE

In summary, Amlogic (Shanghai)Ltd has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 36% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a separate note, we've found 3 warning signs for Amlogic (Shanghai)Ltd you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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

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.