Returns On Capital At Shenzhen Techwinsemi Technology (SZSE:001309) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Looking at Shenzhen Techwinsemi Technology (SZSE:001309), it does have a high ROCE right now, but lets see how returns are trending.

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 Shenzhen Techwinsemi Technology:

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

0.20 = CN¥312m ÷ (CN¥3.8b - CN¥2.3b) (Based on the trailing twelve months to March 2024).

Thus, Shenzhen Techwinsemi Technology has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 3.9%.

Check out our latest analysis for Shenzhen Techwinsemi Technology

In the above chart we have measured Shenzhen Techwinsemi Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shenzhen Techwinsemi Technology .

What Can We Tell From Shenzhen Techwinsemi Technology's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 28% five years ago, while capital employed has grown 857%. 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.

Another thing to note, Shenzhen Techwinsemi Technology has a high ratio of current liabilities to total assets of 59%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

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. And the stock has followed suit returning a meaningful 41% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Shenzhen Techwinsemi Technology, we've discovered 2 warning signs that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.

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