If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Asetek (OB:ASTK), we don't think it's current trends fit the mold of a multi-bagger.
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. Analysts use this formula to calculate it for Asetek:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = US$7.3m ÷ (US$100m - US$19m) (Based on the trailing twelve months to September 2023).
Thus, Asetek has an ROCE of 9.0%. In absolute terms, that's a low return but it's around the Tech industry average of 11%.
View our latest analysis for Asetek
Historical performance is a great place to start when researching a stock so above you can see the gauge for Asetek's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Asetek, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
In terms of Asetek's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 9.0% and the business has deployed 110% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line
In summary, Asetek has simply been reinvesting capital and generating the same low rate of return as before. Moreover, since the stock has crumbled 72% over the last five years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Asetek has the makings of a multi-bagger.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Asetek (of which 3 are concerning!) that you should know about.
While Asetek 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.
About OB:ASTK
Asetek
Engages in the designing, developing, and marketing of liquid cooling solutions in Asia, Europe, and the Americas.
Adequate balance sheet and slightly overvalued.
