We Like These Underlying Return On Capital Trends At Nexchip Semiconductor (SHSE:688249)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Nexchip Semiconductor (SHSE:688249) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Nexchip Semiconductor, this is the formula:

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

0.018 = CN¥771m ÷ (CN¥54b - CN¥10b) (Based on the trailing twelve months to September 2024).

Thus, Nexchip Semiconductor has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 4.3%.

View our latest analysis for Nexchip Semiconductor

In the above chart we have measured Nexchip Semiconductor's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Nexchip Semiconductor for free.

The Trend Of ROCE

Nexchip Semiconductor has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 1.8% which is a sight for sore eyes. Not only that, but the company is utilizing 313% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 19% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

In Conclusion...

Overall, Nexchip Semiconductor gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 23% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Nexchip Semiconductor can keep these trends up, it could have a bright future ahead.

If you want to continue researching Nexchip Semiconductor, you might be interested to know about the 1 warning sign that our analysis has discovered.

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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.