If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Wuxi ETEK MicroelectronicsLtd (SHSE:688601) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Wuxi ETEK MicroelectronicsLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CN¥206m ÷ (CN¥1.5b - CN¥97m) (Based on the trailing twelve months to March 2024).
Thus, Wuxi ETEK MicroelectronicsLtd has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 4.3% it's much better.
In the above chart we have measured Wuxi ETEK MicroelectronicsLtd's 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 Wuxi ETEK MicroelectronicsLtd .
How Are Returns Trending?
We like the trends that we're seeing from Wuxi ETEK MicroelectronicsLtd. Over the last five years, returns on capital employed have risen substantially to 15%. Basically the business is earning more per dollar of capital invested and in addition to that, 435% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a related note, the company's ratio of current liabilities to total assets has decreased to 6.5%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Bottom Line On Wuxi ETEK MicroelectronicsLtd's ROCE
All in all, it's terrific to see that Wuxi ETEK MicroelectronicsLtd is reaping the rewards from prior investments and is growing its capital base. Since the total return from the stock has been almost flat over the last year, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.
Like most companies, Wuxi ETEK MicroelectronicsLtd does come with some risks, and we've found 2 warning signs that you should be aware of.
While Wuxi ETEK MicroelectronicsLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.