Returns On Capital Signal Tricky Times Ahead For AIMECHATEC (TSE:6227)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 briefly looking over the numbers, we don't think AIMECHATEC (TSE:6227) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on AIMECHATEC is:

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

0.021 = JP¥218m ÷ (JP¥22b - JP¥11b) (Based on the trailing twelve months to September 2024).

So, AIMECHATEC has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 13%.

See our latest analysis for AIMECHATEC

Above you can see how the current ROCE for AIMECHATEC compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for AIMECHATEC .

What Does the ROCE Trend For AIMECHATEC Tell Us?

We weren't thrilled with the trend because AIMECHATEC's ROCE has reduced by 86% over the last five years, while the business employed 46% more capital. That being said, AIMECHATEC raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. AIMECHATEC probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, AIMECHATEC has decreased its current liabilities to 51% of total assets. That could partly explain why the ROCE has dropped. 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On AIMECHATEC's ROCE

To conclude, we've found that AIMECHATEC is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 187% return in the last three years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing: We've identified 3 warning signs with AIMECHATEC (at least 1 which is concerning) , and understanding them would certainly be useful.

While AIMECHATEC 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.