Wednesday, February 8, 2023

Capital allocation trends in Semiconductor Manufacturing International (HKG:981) are not ideal

Did you know that there are some financial metrics that can provide clues to a potential multi-bagger? Typically, we would like to notice a tendency to increase Return On Capital Employed (ROCE) and along with it, an extension Base of capital employed. This shows us that it is a compounding machine, capable of continuously rolling its earnings back into the business and generating high returns. However, after looking briefly at the numbers, we don’t think Semiconductor Manufacturing International (HKG:981) It is likely to become a multi-bagger going forward, but let’s see why.

Understanding Return on Capital Employed (ROCE)

For those who don’t know, ROCE is a measure of a company’s annual profit before tax (its return) relative to the capital employed in the business. Analysts use this formula to calculate for Semiconductor Manufacturing International:

Return on Capital Employed = Earnings Before Interest and Taxes (EBIT) (Total Assets – Current Liabilities)

0.01 = US$308m (US$33b – US$3.9b) (Based on the following twelve months to September 2021),

therefore, Semiconductor Manufacturing International’s ROCE is 1.0%. Ultimately, this is a diminishing return and it underperforms the semiconductor industry average of 11%.

See our latest analysis for Semiconductor Manufacturing International

The Year
SEHK:981 Return on Capital Employed 11 Jan 2022

Above you can see how the current ROCE for Semiconductor Manufacturing International compares to its prior return on capital, but there’s only so much you can tell from the past. If you want to see what analysts are forecasting next, you should check out our free Report for Semiconductor Manufacturing International.

What Does the ROCE Trend Tell Us for Semiconductor Manufacturing International?

When we saw the ROCE trend in Semiconductor Manufacturing International, we didn’t believe much. About five years ago the return on capital was 3.9%, but they have fallen to 1.0% since then. Although both capital employed and revenue have increased, it appears that the business is currently pursuing growth, resulting in short-term returns. If these investments prove successful, it could be a great sign for long-term stock performance.

key takeaway

Even though the return on capital has fallen in the short term, we find it promising that both revenue and capital employed for Semiconductor Manufacturing International have increased. Also with the stock climbing 73% over the past five years, it appears investors are excited about the future. So while the underlying trends may already be accounted for by investors, we still think this stock is worth looking forward to.

On a final note, we found 3 Warning Signs for Semiconductor Manufacturing International (2 a little worried) You should be aware.

If you want to find solid companies with good earnings, check this out free List of companies with good balance sheet and impressive return on equity.

This article by Simple Wall St. is general in nature. We only provide commentary based on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to be financial advice. It does not recommend buying or selling any stock, and does not take into account your objectives, or your financial situation. We aim to bring you long-term focused analytics powered by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative content. Simple Wall St does not have a position in any of the stocks mentioned.

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