ELES Semiconductor Equipment (BIT:ELES) Is Reinvesting At Lower Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating ELES Semiconductor Equipment (BIT:ELES), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for ELES Semiconductor Equipment, this is the formula:

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

0.0071 = €195k ÷ (€37m - €9.4m) (Based on the trailing twelve months to June 2022).

Thus, ELES Semiconductor Equipment has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 15%.

View our latest analysis for ELES Semiconductor Equipment

In the above chart we have measured ELES Semiconductor Equipment'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 ELES Semiconductor Equipment here for free.

The Trend Of ROCE

In terms of ELES Semiconductor Equipment's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 9.1%, but since then they've fallen to 0.7%. However it looks like ELES Semiconductor Equipment might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, ELES Semiconductor Equipment has done well to pay down its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. 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.

Our Take On ELES Semiconductor Equipment's ROCE

Bringing it all together, while we're somewhat encouraged by ELES Semiconductor Equipment's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 62% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think ELES Semiconductor Equipment has the makings of a multi-bagger.

If you'd like to know more about ELES Semiconductor Equipment, we've spotted 4 warning signs, and 1 of them shouldn't be ignored.

While ELES Semiconductor Equipment isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.