Southchip Semiconductor Technology(Shanghai) (SHSE:688484) Might Have The Makings Of A Multi-Bagger

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. Speaking of which, we noticed some great changes in Southchip Semiconductor Technology(Shanghai)'s (SHSE:688484) returns on capital, so let's have a look.

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 Southchip Semiconductor Technology(Shanghai) is:

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

0.075 = CN¥293m ÷ (CN¥4.6b - CN¥743m) (Based on the trailing twelve months to September 2024).

Therefore, Southchip Semiconductor Technology(Shanghai) has an ROCE of 7.5%. On its own that's a low return, but compared to the average of 5.0% generated by the Semiconductor industry, it's much better.

Check out our latest analysis for Southchip Semiconductor Technology(Shanghai)

In the above chart we have measured Southchip Semiconductor Technology(Shanghai)'s prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Southchip Semiconductor Technology(Shanghai) .

What Does the ROCE Trend For Southchip Semiconductor Technology(Shanghai) Tell Us?

The fact that Southchip Semiconductor Technology(Shanghai) is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 7.5% on its capital. And unsurprisingly, like most companies trying to break into the black, Southchip Semiconductor Technology(Shanghai) is utilizing 1,263% more capital than it was four years ago. 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.

What We Can Learn From Southchip Semiconductor Technology(Shanghai)'s ROCE

Overall, Southchip Semiconductor Technology(Shanghai) gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 35% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

While Southchip Semiconductor Technology(Shanghai) looks impressive, no company is worth an infinite price. The intrinsic value infographic for 688484 helps visualize whether it is currently trading for a fair price.

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.