There Are Reasons To Feel Uneasy About Shanghai V-Test Semiconductor Tech's (SHSE:688372) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shanghai V-Test Semiconductor Tech:

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

0.026 = CN¥97m ÷ (CN¥4.4b - CN¥582m) (Based on the trailing twelve months to September 2024).

Therefore, Shanghai V-Test Semiconductor Tech has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 4.8%.

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'd like to see what analysts are forecasting going forward, you should check out 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. To be more specific, ROCE has fallen from 7.3% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Shanghai V-Test Semiconductor Tech has decreased its current liabilities to 13% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

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. However, despite the promising trends, the stock has fallen 26% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Shanghai V-Test Semiconductor Tech does have some risks, we noticed 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.