Veeco Instruments' (NASDAQ:VECO) Returns On Capital Are Heading Higher
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Veeco Instruments' (NASDAQ:VECO) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Veeco Instruments is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = US$60m ÷ (US$1.2b - US$268m) (Based on the trailing twelve months to September 2023).
Therefore, Veeco Instruments has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 10%.
View our latest analysis for Veeco Instruments
In the above chart we have measured Veeco Instruments' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Veeco Instruments here for free.
What Can We Tell From Veeco Instruments' ROCE Trend?
We're delighted to see that Veeco Instruments is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 6.2% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. 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. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Key Takeaway
To bring it all together, Veeco Instruments has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 198% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Veeco Instruments can keep these trends up, it could have a bright future ahead.
One more thing to note, we've identified 2 warning signs with Veeco Instruments and understanding them should be part of your investment process.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
