In This Article:
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Having said that, from a first glance at AXT (NASDAQ:AXTI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What is it?
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 AXT:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = US$13m ÷ (US$332m - US$48m) (Based on the trailing twelve months to December 2021).
Therefore, AXT has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 15%.
Check out our latest analysis for AXT
In the above chart we have measured AXT's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for AXT.
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we're seeing at AXT. The company has consistently earned 4.5% for the last five years, and the capital employed within the business has risen 105% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
What We Can Learn From AXT's ROCE
In summary, AXT has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 2.6% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for AXT (of which 1 is a bit unpleasant!) that you should know about.
While AXT 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.