Returns At Xiamen Changelight (SZSE:300102) Are On The Way Up

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Xiamen Changelight (SZSE:300102) so let's look a bit deeper.

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

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. The formula for this calculation on Xiamen Changelight is:

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

0.012 = CN¥57m ÷ (CN¥6.4b - CN¥1.6b) (Based on the trailing twelve months to September 2024).

Therefore, Xiamen Changelight has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 4.8%.

See our latest analysis for Xiamen Changelight

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

What Does the ROCE Trend For Xiamen Changelight Tell Us?

Xiamen Changelight has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 1.2%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Key Takeaway

In summary, we're delighted to see that Xiamen Changelight has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 146% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to know some of the risks facing Xiamen Changelight we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Xiamen Changelight isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.