Capital Allocation Trends At ACM Research (NASDAQ:ACMR) Aren't Ideal
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at ACM Research (NASDAQ:ACMR) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
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 ACM Research:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.096 = US$89m ÷ (US$1.4b - US$482m) (Based on the trailing twelve months to September 2023).
Therefore, ACM Research has an ROCE of 9.6%. On its own, that's a low figure but it's around the 11% average generated by the Semiconductor industry.
See our latest analysis for ACM Research
Above you can see how the current ROCE for ACM Research 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 report for ACM Research.
What The Trend Of ROCE Can Tell Us
In terms of ACM Research's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 14%, but since then they've fallen to 9.6%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On ACM Research's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that ACM Research is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 411% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
If you'd like to know more about ACM Research, we've spotted 2 warning signs, and 1 of them is a bit concerning.
While ACM Research isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
