There Are Reasons To Feel Uneasy About GRINM Semiconductor Materials' (SHSE:688432) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after briefly looking over the numbers, we don't think GRINM Semiconductor Materials (SHSE:688432) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. The formula for this calculation on GRINM Semiconductor Materials is:

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

0.068 = CN¥324m ÷ (CN¥5.0b - CN¥215m) (Based on the trailing twelve months to December 2023).

Therefore, GRINM Semiconductor Materials has an ROCE of 6.8%. On its own, that's a low figure but it's around the 5.8% average generated by the Semiconductor industry.

Check out our latest analysis for GRINM Semiconductor Materials

Above you can see how the current ROCE for GRINM Semiconductor Materials compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for GRINM Semiconductor Materials .

How Are Returns Trending?

In terms of GRINM Semiconductor Materials' historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 6.8% from 9.1% four years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, GRINM Semiconductor Materials has decreased its current liabilities to 4.3% 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. 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 GRINM Semiconductor Materials' ROCE

We're a bit apprehensive about GRINM Semiconductor Materials because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 34% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing GRINM Semiconductor Materials that you might find interesting.

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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.