The Returns On Capital At Lontium Semiconductor (SHSE:688486) Don't Inspire Confidence

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Lontium Semiconductor (SHSE:688486) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Lontium Semiconductor is:

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

0.057 = CN¥82m ÷ (CN¥1.5b - CN¥52m) (Based on the trailing twelve months to March 2024).

So, Lontium Semiconductor has an ROCE of 5.7%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 3.9%.

View our latest analysis for Lontium Semiconductor

In the above chart we have measured Lontium 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 Lontium Semiconductor .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Lontium Semiconductor, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.7% from 13% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Lontium Semiconductor's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Lontium Semiconductor is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 24% 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 Lontium Semiconductor (of which 1 is significant!) that you should know about.

While Lontium 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.

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