Guangdong Cellwise Microelectronics (SHSE:688325) Is Experiencing Growth In Returns On Capital

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Speaking of which, we noticed some great changes in Guangdong Cellwise Microelectronics' (SHSE:688325) returns on capital, so let's have a look.

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

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 Guangdong Cellwise Microelectronics is:

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

0.023 = CN¥38m ÷ (CN¥1.7b - CN¥60m) (Based on the trailing twelve months to June 2024).

Therefore, Guangdong Cellwise Microelectronics has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 4.3%.

View our latest analysis for Guangdong Cellwise Microelectronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Cellwise Microelectronics' ROCE against it's prior returns. If you'd like to look at how Guangdong Cellwise Microelectronics has performed in the past in other metrics, you can view this free graph of Guangdong Cellwise Microelectronics' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Guangdong Cellwise Microelectronics is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 2.3% on its capital. Not only that, but the company is utilizing 3,155% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Guangdong Cellwise Microelectronics has decreased current liabilities to 3.5% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

Long story short, we're delighted to see that Guangdong Cellwise Microelectronics' reinvestment activities have paid off and the company is now profitable. Investors may not be impressed by the favorable underlying trends yet because over the last year the stock has only returned 5.1% to shareholders. So with that in mind, we think the stock deserves further research.

One more thing to note, we've identified 1 warning sign with Guangdong Cellwise Microelectronics and understanding this should be part of your investment process.

While Guangdong Cellwise Microelectronics 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.