Investors Could Be Concerned With Shenzhen Techwinsemi Technology's (SZSE:001309) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Shenzhen Techwinsemi Technology (SZSE:001309) 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shenzhen Techwinsemi Technology, this is the formula:

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

0.041 = CN¥57m ÷ (CN¥3.3b - CN¥1.9b) (Based on the trailing twelve months to December 2023).

Thus, Shenzhen Techwinsemi Technology has an ROCE of 4.1%. In absolute terms, that's a low return but it's around the Semiconductor industry average of 5.1%.

See our latest analysis for Shenzhen Techwinsemi Technology

Above you can see how the current ROCE for Shenzhen Techwinsemi Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shenzhen Techwinsemi Technology .

So How Is Shenzhen Techwinsemi Technology's ROCE Trending?

We weren't thrilled with the trend because Shenzhen Techwinsemi Technology's ROCE has reduced by 90% over the last five years, while the business employed 1,231% more capital. Usually this isn't ideal, but given Shenzhen Techwinsemi Technology conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Shenzhen Techwinsemi Technology might not have received a full period of earnings contribution from it.

On a side note, Shenzhen Techwinsemi Technology's current liabilities are still rather high at 58% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shenzhen Techwinsemi Technology. Furthermore the stock has climbed 91% over the last year, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing Shenzhen Techwinsemi Technology we've found 4 warning signs (2 are potentially serious!) that you should be aware of before investing here.

While Shenzhen Techwinsemi Technology 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.