What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating AT & S Austria Technologie & Systemtechnik (VIE:ATS), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for AT & S Austria Technologie & Systemtechnik, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = €72m ÷ (€4.0b - €1.1b) (Based on the trailing twelve months to June 2023).
Thus, AT & S Austria Technologie & Systemtechnik has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Electronic industry average of 13%.
In the above chart we have measured AT & S Austria Technologie & Systemtechnik's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at AT & S Austria Technologie & Systemtechnik doesn't inspire confidence. Around five years ago the returns on capital were 9.4%, but since then they've fallen to 2.5%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a side note, AT & S Austria Technologie & Systemtechnik's current liabilities have increased over the last five years to 29% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.5%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
Our Take On AT & S Austria Technologie & Systemtechnik's ROCE
Bringing it all together, while we're somewhat encouraged by AT & S Austria Technologie & Systemtechnik's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 60% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
AT & S Austria Technologie & Systemtechnik does have some risks, we noticed 4 warning signs (and 2 which are concerning) we think you should know about.
While AT & S Austria Technologie & Systemtechnik 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.
AT & S Austria Technologie & Systemtechnik
AT & S Austria Technologie & Systemtechnik Aktiengesellschaft, together with its subsidiaries, manufactures and distributes printed circuit boards in Austria, Germany, Other European Countries, China, Other Asian Countries, and the Americas.
Exceptional growth potential and good value.