Returns On Capital Signal Tricky Times Ahead For Changzhou Galaxy Century MicroelectronicsLtd (SHSE:688689)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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 Changzhou Galaxy Century MicroelectronicsLtd (SHSE:688689) 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 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 Changzhou Galaxy Century MicroelectronicsLtd:

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

0.042 = CN¥75m ÷ (CN¥2.1b - CN¥298m) (Based on the trailing twelve months to September 2024).

Therefore, Changzhou Galaxy Century MicroelectronicsLtd has an ROCE of 4.2%. On its own, that's a low figure but it's around the 4.9% average generated by the Semiconductor industry.

See our latest analysis for Changzhou Galaxy Century MicroelectronicsLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Changzhou Galaxy Century MicroelectronicsLtd's ROCE against it's prior returns. If you're interested in investigating Changzhou Galaxy Century MicroelectronicsLtd's past further, check out this free graph covering Changzhou Galaxy Century MicroelectronicsLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Changzhou Galaxy Century MicroelectronicsLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 11% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Changzhou Galaxy Century MicroelectronicsLtd has done well to pay down its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Changzhou Galaxy Century MicroelectronicsLtd's ROCE

While returns have fallen for Changzhou Galaxy Century MicroelectronicsLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 47% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about Changzhou Galaxy Century MicroelectronicsLtd, we've spotted 4 warning signs, and 1 of them can't be ignored.

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.