Be Wary Of Wuxi Chipown Micro-electronics (SHSE:688508) And Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Wuxi Chipown Micro-electronics (SHSE:688508) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. Analysts use this formula to calculate it for Wuxi Chipown Micro-electronics:

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

0.0034 = CN¥8.6m ÷ (CN¥2.8b - CN¥309m) (Based on the trailing twelve months to September 2023).

So, Wuxi Chipown Micro-electronics has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 5.8%.

View our latest analysis for Wuxi Chipown Micro-electronics

Above you can see how the current ROCE for Wuxi Chipown Micro-electronics compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Wuxi Chipown Micro-electronics .

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 20% five years ago, while capital employed has grown 922%. That being said, Wuxi Chipown Micro-electronics raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Wuxi Chipown Micro-electronics might not have received a full period of earnings contribution from it.

The Key Takeaway

In summary, Wuxi Chipown Micro-electronics is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 54% over the last three years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a separate note, we've found 4 warning signs for Wuxi Chipown Micro-electronics you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.