Shenzhen China Micro Semicon (SHSE:688380) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Shenzhen China Micro Semicon (SHSE:688380) and its ROCE trend, we weren't exactly thrilled.

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 Shenzhen China Micro Semicon, this is the formula:

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

0.0054 = CN¥16m ÷ (CN¥3.2b - CN¥163m) (Based on the trailing twelve months to September 2024).

Thus, Shenzhen China Micro Semicon has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 5.0%.

Check out our latest analysis for Shenzhen China Micro Semicon

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen China Micro Semicon's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shenzhen China Micro Semicon.

What Does the ROCE Trend For Shenzhen China Micro Semicon Tell Us?

When we looked at the ROCE trend at Shenzhen China Micro Semicon, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.5% from 15% five years ago. 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 related note, Shenzhen China Micro Semicon has decreased its current liabilities to 5.2% 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.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shenzhen China Micro Semicon. And the stock has followed suit returning a meaningful 74% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing: We've identified 4 warning signs with Shenzhen China Micro Semicon (at least 1 which makes us a bit uncomfortable) , 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.