If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Solomon Systech (International) (HKG:2878) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Solomon Systech (International):
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$16m ÷ (US$157m - US$30m) (Based on the trailing twelve months to December 2023).
So, Solomon Systech (International) has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 8.8% it's much better.
View our latest analysis for Solomon Systech (International)
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Solomon Systech (International).
What The Trend Of ROCE Can Tell Us
The fact that Solomon Systech (International) is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 13% on its capital. Not only that, but the company is utilizing 61% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
Our Take On Solomon Systech (International)'s ROCE
In summary, it's great to see that Solomon Systech (International) has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 103% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Solomon Systech (International) can keep these trends up, it could have a bright future ahead.
If you'd like to know about the risks facing Solomon Systech (International), we've discovered 1 warning sign that you should be aware of.
While Solomon Systech (International) 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.