Champion Microelectronic's (TWSE:3257) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Champion Microelectronic (TWSE:3257) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Champion Microelectronic is:

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

0.14 = NT$231m ÷ (NT$2.0b - NT$415m) (Based on the trailing twelve months to September 2024).

Therefore, Champion Microelectronic has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 9.3% it's much better.

Check out our latest analysis for Champion Microelectronic

Historical performance is a great place to start when researching a stock so above you can see the gauge for Champion Microelectronic's ROCE against it's prior returns. If you'd like to look at how Champion Microelectronic has performed in the past in other metrics, you can view this free graph of Champion Microelectronic's past earnings, revenue and cash flow.

The Trend Of ROCE

Shareholders will be relieved that Champion Microelectronic has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 14% on its capital. 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. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

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 21% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Champion Microelectronic's ROCE

To bring it all together, Champion Microelectronic has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 28% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a separate note, we've found 3 warning signs for Champion Microelectronic you'll probably want to know about.

While Champion Microelectronic 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.