Phoenix Silicon International (TWSE:8028) May Have Issues Allocating Its Capital

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. Having said that, from a first glance at Phoenix Silicon International (TWSE:8028) 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 who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Phoenix Silicon International is:

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

0.05 = NT$364m ÷ (NT$8.8b - NT$1.5b) (Based on the trailing twelve months to September 2024).

Thus, Phoenix Silicon International has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 9.3%.

View our latest analysis for Phoenix Silicon International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Phoenix Silicon International's ROCE against it's prior returns. If you're interested in investigating Phoenix Silicon International's past further, check out this free graph covering Phoenix Silicon International's past earnings, revenue and cash flow.

What Does the ROCE Trend For Phoenix Silicon International Tell Us?

On the surface, the trend of ROCE at Phoenix Silicon International doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.0% from 13% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Phoenix Silicon International's ROCE

In summary, Phoenix Silicon International is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 130% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 2 warning signs for Phoenix Silicon International that we think 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.