Investors Could Be Concerned With Semiconductor Manufacturing International's (HKG:981) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Semiconductor Manufacturing International (HKG:981), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. Analysts use this formula to calculate it for Semiconductor Manufacturing International:

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

0.00094 = US$26m ÷ (US$31b - US$2.9b) (Based on the trailing twelve months to March 2021).

So, Semiconductor Manufacturing International has an ROCE of 0.09%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 8.5%.

See our latest analysis for Semiconductor Manufacturing International

In the above chart we have measured Semiconductor Manufacturing International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Semiconductor Manufacturing International.

What Does the ROCE Trend For Semiconductor Manufacturing International Tell Us?

On the surface, the trend of ROCE at Semiconductor Manufacturing International doesn't inspire confidence. To be more specific, ROCE has fallen from 3.8% 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 side note, Semiconductor Manufacturing International has done well to pay down its current liabilities to 9.5% of total assets. That could partly explain why the ROCE has dropped. 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 Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Semiconductor Manufacturing International is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 290% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing: We've identified 2 warning signs with Semiconductor Manufacturing International (at least 1 which is concerning) , and understanding them would certainly be useful.

While Semiconductor Manufacturing International 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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