Shenzhen Techwinsemi Technology (SZSE:001309) Is Very Good At Capital Allocation

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. With that in mind, the ROCE of Shenzhen Techwinsemi Technology (SZSE:001309) looks great, so lets see what the trend can tell us.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Shenzhen Techwinsemi Technology is:

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

0.33 = CN¥740m ÷ (CN¥5.1b - CN¥2.9b) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen Techwinsemi Technology has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 4.8%.

Check out our latest analysis for Shenzhen Techwinsemi Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Shenzhen Techwinsemi Technology has performed in the past in other metrics, you can view this free graph of Shenzhen Techwinsemi Technology's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shenzhen Techwinsemi Technology Tell Us?

Investors would be pleased with what's happening at Shenzhen Techwinsemi Technology. The data shows that returns on capital have increased substantially over the last five years to 33%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 692%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 56% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Shenzhen Techwinsemi Technology's ROCE

All in all, it's terrific to see that Shenzhen Techwinsemi Technology is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 20% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Shenzhen Techwinsemi Technology, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.