What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. That's why when we briefly looked at ASML Holding's (AMS:ASML) ROCE trend, we were pretty happy with what we saw.
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. Analysts use this formula to calculate it for ASML Holding:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = €3.8b ÷ (€25b - €5.0b) (Based on the trailing twelve months to September 2020).
So, ASML Holding has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 7.0% it's much better.
Above you can see how the current ROCE for ASML Holding 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 ASML Holding here for free.
What Can We Tell From ASML Holding's ROCE Trend?
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 19% and the business has deployed 84% more capital into its operations. Since 19% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
Our Take On ASML Holding's ROCE
To sum it up, ASML Holding has simply been reinvesting capital steadily, at those decent rates of return. On top of that, the stock has rewarded shareholders with a remarkable 331% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
ASML Holding could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While ASML Holding 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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