If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Niche-Tech Semiconductor Materials (HKG:8490), it didn't seem to tick all of these boxes.
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. The formula for this calculation on Niche-Tech Semiconductor Materials is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = HK$14m ÷ (HK$319m - HK$63m) (Based on the trailing twelve months to June 2022).
Thus, Niche-Tech Semiconductor Materials has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 14%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Niche-Tech Semiconductor Materials, check out these free graphs here.
What Can We Tell From Niche-Tech Semiconductor Materials' ROCE Trend?
In terms of Niche-Tech Semiconductor Materials' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 7.6% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, Niche-Tech Semiconductor Materials has decreased its current liabilities to 20% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
In summary, despite lower returns in the short term, we're encouraged to see that Niche-Tech Semiconductor Materials is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 64% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you'd like to know about the risks facing Niche-Tech Semiconductor Materials, we've discovered 1 warning sign that you should be aware of.
While Niche-Tech Semiconductor Materials 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.
Niche-Tech Semiconductor Materials
Niche-Tech Semiconductor Materials Limited, an investment holding company, develops, manufactures, and sells semiconductor packaging materials in the People’s Republic of China and Hong Kong.
Excellent balance sheet with acceptable track record.