Investors Will Want Union Semiconductor (Hefei)'s (SHSE:688403) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Union Semiconductor (Hefei)'s (SHSE:688403) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Union Semiconductor (Hefei), this is the formula:

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

0.051 = CN¥164m ÷ (CN¥3.7b - CN¥468m) (Based on the trailing twelve months to March 2024).

So, Union Semiconductor (Hefei) has an ROCE of 5.1%. On its own that's a low return, but compared to the average of 3.9% generated by the Semiconductor industry, it's much better.

See our latest analysis for Union Semiconductor (Hefei)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Union Semiconductor (Hefei)'s ROCE against it's prior returns. If you'd like to look at how Union Semiconductor (Hefei) has performed in the past in other metrics, you can view this free graph of Union Semiconductor (Hefei)'s past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Union Semiconductor (Hefei) has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 5.1% on its capital. In addition to that, Union Semiconductor (Hefei) is employing 590% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 13%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Union Semiconductor (Hefei) has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Union Semiconductor (Hefei)'s ROCE

Overall, Union Semiconductor (Hefei) gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 31% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing: We've identified 2 warning signs with Union Semiconductor (Hefei) (at least 1 which is concerning) , and understanding them would certainly be useful.

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.

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