Hua Hong Semiconductor's (HKG:1347) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Hua Hong Semiconductor (HKG:1347) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Hua Hong Semiconductor, this is the formula:

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

0.045 = US$412m ÷ (US$10.0b - US$851m) (Based on the trailing twelve months to September 2023).

Thus, Hua Hong Semiconductor has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 12%.

See our latest analysis for Hua Hong Semiconductor

In the above chart we have measured Hua Hong Semiconductor's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hua Hong Semiconductor here for free.

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 7.8% five years ago, while capital employed has grown 299%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hua Hong Semiconductor's earnings and if they change as a result from the capital raise.

The Bottom Line On Hua Hong Semiconductor's ROCE

To conclude, we've found that Hua Hong Semiconductor is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think Hua Hong Semiconductor has the makings of a multi-bagger.

If you'd like to know more about Hua Hong Semiconductor, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.

While Hua Hong Semiconductor 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.