Returns On Capital At Semiconductor Manufacturing International (HKG:981) Have Stalled

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Although, when we looked at Semiconductor Manufacturing International (HKG:981), it didn't seem to tick all of these boxes.

What Is 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 Semiconductor Manufacturing International, this is the formula:

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

0.0026 = US$101m ÷ (US$47b - US$8.4b) (Based on the trailing twelve months to September 2023).

Therefore, Semiconductor Manufacturing International has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 12%.

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, you can check out the forecasts from the analysts covering Semiconductor Manufacturing International here for free.

What Can We Tell From Semiconductor Manufacturing International's ROCE Trend?

In terms of Semiconductor Manufacturing International's historical ROCE trend, it doesn't exactly demand attention. The company has employed 253% more capital in the last five years, and the returns on that capital have remained stable at 0.3%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Semiconductor Manufacturing International's ROCE

Long story short, while Semiconductor Manufacturing International has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 74% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Semiconductor Manufacturing International does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit unpleasant...

While Semiconductor Manufacturing International may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.