Foxsemicon Integrated Technology (TWSE:3413) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after briefly looking over the numbers, we don't think Foxsemicon Integrated Technology (TWSE:3413) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Foxsemicon Integrated Technology, this is the formula:

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

0.13 = NT$2.1b ÷ (NT$21b - NT$5.2b) (Based on the trailing twelve months to June 2024).

So, Foxsemicon Integrated Technology has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Semiconductor industry.

See our latest analysis for Foxsemicon Integrated Technology

Above you can see how the current ROCE for Foxsemicon Integrated Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Foxsemicon Integrated Technology for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Foxsemicon Integrated Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 19% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Foxsemicon Integrated Technology has decreased its current liabilities to 25% 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.

The Bottom Line On Foxsemicon Integrated Technology's ROCE

In summary, we're somewhat concerned by Foxsemicon Integrated Technology's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 278% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know about the risks facing Foxsemicon Integrated Technology, we've discovered 3 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.