Be Wary Of Yield Microelectronics (TWSE:6423) And Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Yield Microelectronics (TWSE:6423) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Yield Microelectronics is:

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

0.059 = NT$35m ÷ (NT$641m - NT$55m) (Based on the trailing twelve months to September 2024).

Therefore, Yield Microelectronics has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 9.3%.

Check out our latest analysis for Yield Microelectronics

In the above chart we have measured Yield Microelectronics' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Yield Microelectronics .

What Does the ROCE Trend For Yield Microelectronics Tell Us?

We weren't thrilled with the trend because Yield Microelectronics' ROCE has reduced by 45% over the last five years, while the business employed 124% more capital. Usually this isn't ideal, but given Yield Microelectronics conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Yield Microelectronics' earnings and if they change as a result from the capital raise.

What We Can Learn From Yield Microelectronics' ROCE

In summary, Yield Microelectronics is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 124% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know about the risks facing Yield Microelectronics, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.