Shanghai Fudan Microelectronics Group (HKG:1385) Is Experiencing Growth In Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Shanghai Fudan Microelectronics Group (HKG:1385) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Shanghai Fudan Microelectronics Group:

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

0.13 = CN¥848m ÷ (CN¥8.1b - CN¥1.7b) (Based on the trailing twelve months to September 2023).

Thus, Shanghai Fudan Microelectronics Group has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Semiconductor industry average of 12%.

See our latest analysis for Shanghai Fudan Microelectronics Group

Above you can see how the current ROCE for Shanghai Fudan Microelectronics Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shanghai Fudan Microelectronics Group here for free.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Shanghai Fudan Microelectronics Group. The data shows that returns on capital have increased substantially over the last five years to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 202% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Shanghai Fudan Microelectronics Group's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Shanghai Fudan Microelectronics Group has. And with a respectable 57% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

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

While Shanghai Fudan Microelectronics Group 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.