Be Wary Of ams-OSRAM (VTX:AMS) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at ams-OSRAM (VTX:AMS) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for ams-OSRAM, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0083 = €51m ÷ (€8.8b - €2.7b) (Based on the trailing twelve months to December 2022).

Thus, ams-OSRAM has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 15%.

Check out our latest analysis for ams-OSRAM

In the above chart we have measured ams-OSRAM's 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 ams-OSRAM here for free.

SWOT Analysis for ams-OSRAM

What Can We Tell From ams-OSRAM's ROCE Trend?

On the surface, the trend of ROCE at ams-OSRAM doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.8% from 3.9% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, ams-OSRAM has done well to pay down its current liabilities to 31% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

To conclude, we've found that ams-OSRAM is reinvesting in the business, but returns have been falling. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 89% over the last five years. Therefore based on the analysis done in this article, we don't think ams-OSRAM has the makings of a multi-bagger.

If you'd like to know about the risks facing ams-OSRAM, we've discovered 2 warning signs that you should be aware of.

While ams-OSRAM may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.