Returns On Capital Are Showing Encouraging Signs At Aehr Test Systems (NASDAQ:AEHR)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Aehr Test Systems' (NASDAQ:AEHR) returns on capital, so let's have a look.

Understanding 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. The formula for this calculation on Aehr Test Systems is:

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

0.18 = US$14m ÷ (US$84m - US$9.4m) (Based on the trailing twelve months to February 2023).

Thus, Aehr Test Systems has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 14% generated by the Semiconductor industry.

View our latest analysis for Aehr Test Systems

In the above chart we have measured Aehr Test Systems' 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 report on analyst forecasts for the company.

The Trend Of ROCE

The trends we've noticed at Aehr Test Systems are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 18%. The amount of capital employed has increased too, by 196%. So we're very much inspired by what we're seeing at Aehr Test Systems thanks to its ability to profitably reinvest capital.

Our Take On Aehr Test Systems' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Aehr Test Systems has. Since the stock has returned a staggering 1,249% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 3 warning signs with Aehr Test Systems (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

While Aehr Test Systems 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.