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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at EnSilica (LON:ENSI) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. Analysts use this formula to calculate it for EnSilica:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = UK£872k ÷ (UK£37m - UK£9.0m) (Based on the trailing twelve months to May 2024).
Therefore, EnSilica has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 12%.
Check out our latest analysis for EnSilica
Above you can see how the current ROCE for EnSilica compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for EnSilica .
What The Trend Of ROCE Can Tell Us
The trend of ROCE doesn't look fantastic because it's fallen from 12% five years ago, while the business's capital employed increased by 444%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. EnSilica probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. It's also worth noting the company's latest EBIT figure is within 10% of the previous year, so it's fair to assign the ROCE drop largely to the capital raise.
The Bottom Line On EnSilica's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for EnSilica. These growth trends haven't led to growth returns though, since the stock has fallen 35% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
If you'd like to know about the risks facing EnSilica, we've discovered 3 warning signs that you should be aware of.