Wuxi ETEK MicroelectronicsLtd (SHSE:688601) Might Have The Makings Of A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Wuxi ETEK MicroelectronicsLtd's (SHSE:688601) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Wuxi ETEK MicroelectronicsLtd:

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

0.13 = CN¥174m ÷ (CN¥1.4b - CN¥99m) (Based on the trailing twelve months to September 2024).

Therefore, Wuxi ETEK MicroelectronicsLtd has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 4.9% it's much better.

Check out our latest analysis for Wuxi ETEK MicroelectronicsLtd

In the above chart we have measured Wuxi ETEK MicroelectronicsLtd'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 Wuxi ETEK MicroelectronicsLtd for free.

What The Trend Of ROCE Can Tell Us

Wuxi ETEK MicroelectronicsLtd is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 13%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 391%. So we're very much inspired by what we're seeing at Wuxi ETEK MicroelectronicsLtd thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 6.8%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Wuxi ETEK MicroelectronicsLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

In summary, it's great to see that Wuxi ETEK MicroelectronicsLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And since the stock has fallen 40% over the last three years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing to note, we've identified 1 warning sign with Wuxi ETEK MicroelectronicsLtd and understanding this should be part of your investment process.

While Wuxi ETEK MicroelectronicsLtd 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.