Under The Bonnet, Solomon Systech (International)'s (HKG:2878) Returns Look Impressive

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Solomon Systech (International)'s (HKG:2878) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Solomon Systech (International) is:

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

0.31 = US$34m ÷ (US$169m - US$61m) (Based on the trailing twelve months to June 2022).

Therefore, Solomon Systech (International) has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 14%.

View our latest analysis for Solomon Systech (International)

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

What Does the ROCE Trend For Solomon Systech (International) Tell Us?

Shareholders will be relieved that Solomon Systech (International) has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 31%, 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. Because in the end, a business can only get so efficient.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 36% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

To bring it all together, Solomon Systech (International) has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 41% return over the last five years. In light of that, we think it's worth looking further into this stock because if Solomon Systech (International) can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing Solomon Systech (International) that you might find interesting.

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.