If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. With that in mind, we've noticed some promising trends at Semiconductor Manufacturing International (HKG:981) so let's look a bit deeper.
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. Analysts use this formula to calculate it for Semiconductor Manufacturing International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0071 = US$286m ÷ (US$49b - US$8.8b) (Based on the trailing twelve months to December 2024).
Therefore, Semiconductor Manufacturing International has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 5.2%.
See our latest analysis for Semiconductor Manufacturing International
Above you can see how the current ROCE for Semiconductor Manufacturing International 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 Semiconductor Manufacturing International .
What Can We Tell From Semiconductor Manufacturing International's ROCE Trend?
The fact that Semiconductor Manufacturing 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 0.7% on its capital. In addition to that, Semiconductor Manufacturing International is employing 205% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
What We Can Learn From Semiconductor Manufacturing International's ROCE
Long story short, we're delighted to see that Semiconductor Manufacturing International's reinvestment activities have paid off and the company is now profitable. And a remarkable 204% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you'd like to know about the risks facing Semiconductor Manufacturing International, we've discovered 2 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.
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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.