Investors Should Be Encouraged By Shanghai Fudan Microelectronics Group's (HKG:1385) Returns On Capital

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Shanghai Fudan Microelectronics Group (HKG:1385) we really liked what we saw.

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. To calculate this metric for Shanghai Fudan Microelectronics Group, this is the formula:

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

0.20 = CN¥1.1b ÷ (CN¥6.1b - CN¥904m) (Based on the trailing twelve months to December 2022).

Thus, Shanghai Fudan Microelectronics Group has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 13%.

See our latest analysis for Shanghai Fudan Microelectronics Group

In the above chart we have measured Shanghai Fudan Microelectronics Group'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 Shanghai Fudan Microelectronics Group here for free.

What Can We Tell From Shanghai Fudan Microelectronics Group's ROCE Trend?

Shanghai Fudan Microelectronics Group is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 20%. 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 192%. 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.

Our Take On Shanghai Fudan Microelectronics Group's ROCE

In summary, it's great to see that Shanghai Fudan Microelectronics Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 295% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Shanghai Fudan Microelectronics Group can keep these trends up, it could have a bright future ahead.

If you want to continue researching Shanghai Fudan Microelectronics Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.