There Are Reasons To Feel Uneasy About Yuanjie Semiconductor Technology's (SHSE:688498) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Yuanjie Semiconductor Technology (SHSE:688498) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Yuanjie Semiconductor Technology:

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

0.0085 = CN¥18m ÷ (CN¥2.2b - CN¥102m) (Based on the trailing twelve months to December 2023).

Therefore, Yuanjie Semiconductor Technology has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 5.3%.

See our latest analysis for Yuanjie Semiconductor Technology

In the above chart we have measured Yuanjie Semiconductor Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Yuanjie Semiconductor Technology for free.

How Are Returns Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 5.4% four years ago, while the business's capital employed increased by 973%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Yuanjie Semiconductor Technology might not have received a full period of earnings contribution from it.

What We Can Learn From Yuanjie Semiconductor Technology's ROCE

We're a bit apprehensive about Yuanjie Semiconductor Technology 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 35% over the last year, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Yuanjie Semiconductor Technology does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Yuanjie Semiconductor Technology 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.