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If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating AEM Holdings (SGX:AWX), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for AEM Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = S$35m ÷ (S$647m - S$56m) (Based on the trailing twelve months to September 2024).
Therefore, AEM Holdings has an ROCE of 5.9%. On its own that's a low return, but compared to the average of 3.6% generated by the Semiconductor industry, it's much better.
Check out our latest analysis for AEM Holdings
Above you can see how the current ROCE for AEM Holdings 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 AEM Holdings .
How Are Returns Trending?
On the surface, the trend of ROCE at AEM Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.9% from 42% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a related note, AEM Holdings has decreased its current liabilities to 8.7% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
Our Take On AEM Holdings' ROCE
We're a bit apprehensive about AEM Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 21% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.