Here's What To Make Of Amlogic (Shanghai)Ltd's (SHSE:688099) Decelerating Rates Of Return

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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Amlogic (Shanghai)Ltd (SHSE:688099) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Amlogic (Shanghai)Ltd:

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).

Therefore, Amlogic (Shanghai)Ltd has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 5.3% generated by the Semiconductor industry, it's much better.

Check out our latest analysis for Amlogic (Shanghai)Ltd

Above you can see how the current ROCE for Amlogic (Shanghai)Ltd 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 Amlogic (Shanghai)Ltd .

So How Is Amlogic (Shanghai)Ltd's ROCE Trending?

The returns on capital haven't changed much for Amlogic (Shanghai)Ltd in recent years. Over the past five years, ROCE has remained relatively flat at around 7.9% and the business has deployed 122% 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.

Our Take On Amlogic (Shanghai)Ltd's ROCE

In conclusion, Amlogic (Shanghai)Ltd has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly, the stock has only gained 32% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we've found 2 warning signs for Amlogic (Shanghai)Ltd that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.