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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Looking at BE Semiconductor Industries (AMS:BESI), it does have a high ROCE right now, but lets see how returns are trending.
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 BE Semiconductor Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = €196m ÷ (€851m - €135m) (Based on the trailing twelve months to September 2023).
Therefore, BE Semiconductor Industries has an ROCE of 27%. 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 BE Semiconductor Industries
Above you can see how the current ROCE for BE Semiconductor Industries 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 report on analyst forecasts for the company.
What Can We Tell From BE Semiconductor Industries' ROCE Trend?
Things have been pretty stable at BE Semiconductor Industries, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So it may not be a multi-bagger in the making, but given the decent 27% return on capital, it'd be difficult to find fault with the business's current operations. That probably explains why BE Semiconductor Industries has been paying out 83% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.
What We Can Learn From BE Semiconductor Industries' ROCE
While BE Semiconductor Industries has impressive profitability from its capital, it isn't increasing that amount of capital. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 673% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.