Returns On Capital At Circuit Fabology Microelectronics EquipmentLtd (SHSE:688630) Have Hit The Brakes

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Circuit Fabology Microelectronics EquipmentLtd (SHSE:688630) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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 Circuit Fabology Microelectronics EquipmentLtd:

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

0.074 = CN¥158m ÷ (CN¥2.5b - CN¥389m) (Based on the trailing twelve months to March 2024).

So, Circuit Fabology Microelectronics EquipmentLtd has an ROCE of 7.4%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 4.1%.

See our latest analysis for Circuit Fabology Microelectronics EquipmentLtd

In the above chart we have measured Circuit Fabology Microelectronics EquipmentLtd'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 Circuit Fabology Microelectronics EquipmentLtd for free.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Circuit Fabology Microelectronics EquipmentLtd. The company has consistently earned 7.4% for the last five years, and the capital employed within the business has risen 1,094% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Circuit Fabology Microelectronics EquipmentLtd has done well to reduce current liabilities to 15% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Circuit Fabology Microelectronics EquipmentLtd's ROCE

As we've seen above, Circuit Fabology Microelectronics EquipmentLtd's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 25% over the last three years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Circuit Fabology Microelectronics EquipmentLtd (of which 1 is significant!) that you should 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.