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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Veeco Instruments (NASDAQ:VECO) so let's look a bit deeper.
What Is 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 Veeco Instruments:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.087 = US$92m ÷ (US$1.3b - US$215m) (Based on the trailing twelve months to September 2024).
Therefore, Veeco Instruments has an ROCE of 8.7%. On its own, that's a low figure but it's around the 8.5% average generated by the Semiconductor industry.
Check out our latest analysis for Veeco Instruments
Above you can see how the current ROCE for Veeco Instruments 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 Veeco Instruments .
What Does the ROCE Trend For Veeco Instruments Tell Us?
The fact that Veeco Instruments is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.7% on its capital. Not only that, but the company is utilizing 47% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Bottom Line
Overall, Veeco Instruments gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 79% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.