Investors Will Want ams-OSRAM's (VTX:AMS) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in ams-OSRAM's (VTX:AMS) 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. 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)

0.032 = €123m ÷ (€6.7b - €2.8b) (Based on the trailing twelve months to June 2024).

Thus, ams-OSRAM has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 11%.

Check out our latest analysis for ams-OSRAM

Above you can see how the current ROCE for ams-OSRAM compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for ams-OSRAM .

What The Trend Of ROCE Can Tell Us

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 3.2%. The amount of capital employed has increased too, by 35%. So we're very much inspired by what we're seeing at ams-OSRAM thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 42% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On ams-OSRAM's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what ams-OSRAM has. Although the company may be facing some issues elsewhere since the stock has plunged 94% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

On a separate note, we've found 2 warning signs for ams-OSRAM you'll probably want to know about.

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.