China Resources Microelectronics (SHSE:688396) Will Want To Turn Around Its Return Trends

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at China Resources Microelectronics (SHSE:688396) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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 China Resources Microelectronics is:

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

0.031 = CN¥766m ÷ (CN¥29b - CN¥4.7b) (Based on the trailing twelve months to September 2024).

Thus, China Resources Microelectronics has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 4.8%.

See our latest analysis for China Resources Microelectronics

Above you can see how the current ROCE for China Resources Microelectronics compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for China Resources Microelectronics .

The Trend Of ROCE

In terms of China Resources Microelectronics' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 4.5% over the last five years. However it looks like China Resources Microelectronics might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, China Resources Microelectronics has decreased its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. 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 Bottom Line On China Resources Microelectronics' ROCE

To conclude, we've found that China Resources Microelectronics is reinvesting in the business, but returns have been falling. Since the stock has declined 28% over the last three years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

China Resources Microelectronics does have some risks though, and we've spotted 1 warning sign for China Resources Microelectronics that you might be interested in.

While China Resources Microelectronics 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.