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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. With that in mind, the ROCE of Elmos Semiconductor (ETR:ELG) looks great, so lets see what the trend can tell us.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Elmos Semiconductor:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = €154m ÷ (€800m - €216m) (Based on the trailing twelve months to March 2024).
Therefore, Elmos Semiconductor has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 17%.
See our latest analysis for Elmos Semiconductor
In the above chart we have measured Elmos Semiconductor's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Elmos Semiconductor .
What Can We Tell From Elmos Semiconductor's ROCE Trend?
We like the trends that we're seeing from Elmos Semiconductor. Over the last five years, returns on capital employed have risen substantially to 26%. The amount of capital employed has increased too, by 75%. So we're very much inspired by what we're seeing at Elmos Semiconductor thanks to its ability to profitably reinvest capital.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 27% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
What We Can Learn From Elmos Semiconductor's ROCE
To sum it up, Elmos Semiconductor has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 263% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.