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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Sumco (TSE:3436) and its ROCE trend, we weren't exactly thrilled.
What Is 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 Sumco is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = JP¥41b ÷ (JP¥1.1t - JP¥172b) (Based on the trailing twelve months to September 2024).
So, Sumco has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 13%.
View our latest analysis for Sumco
In the above chart we have measured Sumco's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Sumco .
The Trend Of ROCE
On the surface, the trend of ROCE at Sumco doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.3% from 13% five years ago. However it looks like Sumco 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 may take some time before the company starts to see any change in earnings from these investments.
Our Take On Sumco's ROCE
To conclude, we've found that Sumco is reinvesting in the business, but returns have been falling. Since the stock has declined 29% over the last five 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 Sumco has the makings of a multi-bagger.
Sumco does have some risks though, and we've spotted 1 warning sign for Sumco that you might be interested in.
While Sumco 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.
About TSE:3436
Sumco
Manufactures and sells silicon wafers for the semiconductor industry in Japan, the United States, China, Taiwan, Korea, and internationally.
Excellent balance sheet with reasonable growth potential.
