Returns On Capital Are Showing Encouraging Signs At ACM Research (NASDAQ:ACMR)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, ACM Research (NASDAQ:ACMR) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

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 ACM Research:

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

0.09 = US$77m ÷ (US$1.3b - US$450m) (Based on the trailing twelve months to March 2023).

Therefore, ACM Research has an ROCE of 9.0%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 13%.

See our latest analysis for ACM Research

Above you can see how the current ROCE for ACM Research compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for ACM Research.

SWOT Analysis for ACM Research

What Can We Tell From ACM Research's ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 9.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 1,654% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From ACM Research's ROCE

To sum it up, ACM Research has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if ACM Research can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with ACM Research and understanding it should be part of your investment process.

While ACM Research 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.