Shanghai V-Test Semiconductor Tech (SHSE:688372) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Shanghai V-Test Semiconductor Tech (SHSE:688372) 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)?

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. The formula for this calculation on Shanghai V-Test Semiconductor Tech is:

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

0.025 = CN¥79m ÷ (CN¥3.8b - CN¥635m) (Based on the trailing twelve months to March 2024).

Thus, Shanghai V-Test Semiconductor Tech has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 4.6%.

Check out our latest analysis for Shanghai V-Test Semiconductor Tech

Above you can see how the current ROCE for Shanghai V-Test Semiconductor Tech compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shanghai V-Test Semiconductor Tech .

What Does the ROCE Trend For Shanghai V-Test Semiconductor Tech Tell Us?

When we looked at the ROCE trend at Shanghai V-Test Semiconductor Tech, we didn't gain much confidence. Around five years ago the returns on capital were 8.1%, but since then they've fallen to 2.5%. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Shanghai V-Test Semiconductor Tech has done well to pay down its current liabilities to 17% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Shanghai V-Test Semiconductor Tech's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shanghai V-Test Semiconductor Tech. These growth trends haven't led to growth returns though, since the stock has fallen 59% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 4 warning signs with Shanghai V-Test Semiconductor Tech (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

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.