Here's What's Concerning About uPI Semiconductor's (TWSE:6719) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at uPI Semiconductor (TWSE:6719) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for uPI Semiconductor, this is the formula:

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

0.013 = NT$190m ÷ (NT$16b - NT$652m) (Based on the trailing twelve months to September 2024).

Therefore, uPI Semiconductor has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 9.3%.

Check out our latest analysis for uPI Semiconductor

Above you can see how the current ROCE for uPI Semiconductor compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for uPI Semiconductor .

What Does the ROCE Trend For uPI Semiconductor Tell Us?

We weren't thrilled with the trend because uPI Semiconductor's ROCE has reduced by 88% over the last five years, while the business employed 803% more capital. Usually this isn't ideal, but given uPI Semiconductor 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 uPI Semiconductor's earnings and if they change as a result from the capital raise.

On a related note, uPI Semiconductor has decreased its current liabilities to 4.1% 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...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for uPI Semiconductor. However, despite the promising trends, the stock has fallen 68% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Like most companies, uPI Semiconductor does come with some risks, and we've found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.