Be Wary Of Circuit Fabology Microelectronics EquipmentLtd (SHSE:688630) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Circuit Fabology Microelectronics EquipmentLtd (SHSE:688630), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Circuit Fabology Microelectronics EquipmentLtd is:

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

0.082 = CN¥175m ÷ (CN¥2.7b - CN¥571m) (Based on the trailing twelve months to December 2024).

So, Circuit Fabology Microelectronics EquipmentLtd has an ROCE of 8.2%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 5.9%.

Check out our latest analysis for Circuit Fabology Microelectronics EquipmentLtd

Above you can see how the current ROCE for Circuit Fabology Microelectronics EquipmentLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Circuit Fabology Microelectronics EquipmentLtd for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Circuit Fabology Microelectronics EquipmentLtd doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 8.2%. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

While returns have fallen for Circuit Fabology Microelectronics EquipmentLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 23% over the last three years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you want to continue researching Circuit Fabology Microelectronics EquipmentLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Circuit Fabology Microelectronics EquipmentLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.