Shanghai V-Test Semiconductor Tech (SHSE:688372) Will Want To Turn Around Its Return Trends

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Shanghai V-Test Semiconductor Tech (SHSE:688372), we don't think it's current trends fit the mold of a multi-bagger.

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Understanding 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)

0.036 = CN¥136m ÷ (CN¥4.4b - CN¥582m) (Based on the trailing twelve months to December 2024).

Thus, Shanghai V-Test Semiconductor Tech has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 5.7%.

View our latest analysis for Shanghai V-Test Semiconductor Tech

In the above chart we have measured Shanghai V-Test Semiconductor Tech'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 Shanghai V-Test Semiconductor Tech .

How Are Returns Trending?

On the surface, the trend of ROCE at Shanghai V-Test Semiconductor Tech doesn't inspire confidence. Around five years ago the returns on capital were 8.2%, but since then they've fallen to 3.6%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Shanghai V-Test Semiconductor Tech has done well to pay down its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Shanghai V-Test Semiconductor Tech is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 45% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Shanghai V-Test Semiconductor Tech does come with some risks, and we've found 2 warning signs that you should be aware of.

While Shanghai V-Test Semiconductor Tech isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.