Elmos Semiconductor (ETR:ELG) Is Very Good At Capital Allocation

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Elmos Semiconductor (ETR:ELG) looks great, so lets see what the trend can tell us.

What Is 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 Elmos Semiconductor, this is the formula:

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

0.26 = €154m ÷ (€800m - €216m) (Based on the trailing twelve months to March 2024).

Therefore, Elmos Semiconductor has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 17%.

See our latest analysis for Elmos Semiconductor

In the above chart we have measured Elmos Semiconductor'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 Elmos Semiconductor for free.

The Trend Of ROCE

Investors would be pleased with what's happening at Elmos Semiconductor. Over the last five years, returns on capital employed have risen substantially to 26%. The amount of capital employed has increased too, by 75%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 27% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Elmos Semiconductor's ROCE

All in all, it's terrific to see that Elmos Semiconductor is reaping the rewards from prior investments and is growing its capital base. And a remarkable 343% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Elmos Semiconductor can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Elmos Semiconductor and understanding it should be part of your investment process.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.