Returns On Capital Are Showing Encouraging Signs At MEMSCAP (EPA:MEMS)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Speaking of which, we noticed some great changes in MEMSCAP's (EPA:MEMS) returns on capital, so let's have a look.

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 MEMSCAP is:

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

0.035 = €711k ÷ (€23m - €3.2m) (Based on the trailing twelve months to March 2023).

Thus, MEMSCAP has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 12%.

View our latest analysis for MEMSCAP

Above you can see how the current ROCE for MEMSCAP compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering MEMSCAP here for free.

The Trend Of ROCE

Shareholders will be relieved that MEMSCAP has broken into profitability. The company now earns 3.5% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by MEMSCAP has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

The Bottom Line On MEMSCAP's ROCE

To bring it all together, MEMSCAP has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 99% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 2 warning signs for MEMSCAP you'll probably want to 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.