Investors Could Be Concerned With ams-OSRAM's (VTX:AMS) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. 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)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on ams-OSRAM is:

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

0.0061 = €41m ÷ (€9.6b - €2.9b) (Based on the trailing twelve months to March 2022).

Therefore, ams-OSRAM has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 12%.

See 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.

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 0.6% from 2.0% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

While returns have fallen for ams-OSRAM in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 76% in the last five years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.

ams-OSRAM does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.