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What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Amtech Systems' (NASDAQ:ASYS) returns on capital, so let's have a look.
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. The formula for this calculation on Amtech Systems is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.042 = US$3.7m ÷ (US$100m - US$9.7m) (Based on the trailing twelve months to March 2020).
Therefore, Amtech Systems has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 9.2%.
In the above chart we have a measured Amtech Systems' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Amtech Systems.
The Trend Of ROCE
We're delighted to see that Amtech Systems is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.2%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.
One more thing to note, Amtech Systems has decreased current liabilities to 9.7% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Amtech Systems has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
To sum it up, Amtech Systems is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 45% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you'd like to know about the risks facing Amtech Systems, we've discovered 3 warning signs that you should be aware of.
While Amtech Systems isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. 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.
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