Here's What To Make Of Shanghai Sinyang Semiconductor Materials' (SZSE:300236) Decelerating Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Shanghai Sinyang Semiconductor Materials (SZSE:300236), it didn't seem to tick all of these boxes.

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

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. The formula for this calculation on Shanghai Sinyang Semiconductor Materials is:

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

0.034 = CN¥151m ÷ (CN¥5.2b - CN¥785m) (Based on the trailing twelve months to June 2024).

Thus, Shanghai Sinyang Semiconductor Materials has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 4.3%.

View our latest analysis for Shanghai Sinyang Semiconductor Materials

In the above chart we have measured Shanghai Sinyang Semiconductor Materials' 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 Shanghai Sinyang Semiconductor Materials .

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Shanghai Sinyang Semiconductor Materials. Over the past five years, ROCE has remained relatively flat at around 3.4% and the business has deployed 187% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

In conclusion, Shanghai Sinyang Semiconductor Materials has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 61% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Shanghai Sinyang Semiconductor Materials does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.