Guizhou Zhenhua Fengguang Semiconductor (SHSE:688439) Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Guizhou Zhenhua Fengguang Semiconductor (SHSE:688439), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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 Guizhou Zhenhua Fengguang Semiconductor is:

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

0.13 = CN¥637m ÷ (CN¥5.6b - CN¥542m) (Based on the trailing twelve months to March 2024).

Therefore, Guizhou Zhenhua Fengguang Semiconductor has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 4.2% generated by the Semiconductor industry.

See our latest analysis for Guizhou Zhenhua Fengguang Semiconductor

In the above chart we have measured Guizhou Zhenhua Fengguang Semiconductor'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 Guizhou Zhenhua Fengguang Semiconductor .

How Are Returns Trending?

When we looked at the ROCE trend at Guizhou Zhenhua Fengguang Semiconductor, we didn't gain much confidence. To be more specific, ROCE has fallen from 21% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Guizhou Zhenhua Fengguang Semiconductor has done well to pay down its current liabilities to 9.8% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Guizhou Zhenhua Fengguang Semiconductor's ROCE

While returns have fallen for Guizhou Zhenhua Fengguang Semiconductor in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 46% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Guizhou Zhenhua Fengguang Semiconductor (of which 1 doesn't sit too well with us!) that 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.