Some Investors May Be Worried About Guizhou Zhenhua Fengguang Semiconductor's (SHSE:688439) Returns On Capital

What are the early trends we should look for to identify a stock that could 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. 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 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 Guizhou Zhenhua Fengguang Semiconductor is:

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

0.15 = CN¥710m ÷ (CN¥5.2b - CN¥515m) (Based on the trailing twelve months to December 2023).

So, Guizhou Zhenhua Fengguang Semiconductor has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Semiconductor industry.

See our latest analysis for Guizhou Zhenhua Fengguang Semiconductor

Above you can see how the current ROCE for Guizhou Zhenhua Fengguang Semiconductor compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Guizhou Zhenhua Fengguang Semiconductor for free.

What Can We Tell From Guizhou Zhenhua Fengguang Semiconductor's ROCE Trend?

On the surface, the trend of ROCE at Guizhou Zhenhua Fengguang Semiconductor doesn't inspire confidence. Over the last four years, returns on capital have decreased to 15% from 27% four 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. 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. 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. 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.

Our Take On Guizhou Zhenhua Fengguang Semiconductor's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Guizhou Zhenhua Fengguang Semiconductor. However, despite the promising trends, the stock has fallen 36% 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.

Guizhou Zhenhua Fengguang Semiconductor could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 688439 on our platform quite valuable.

While Guizhou Zhenhua Fengguang Semiconductor may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.