Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in Amtech Systems' (NASDAQ:ASYS) returns on capital, so let's have a look.
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. To calculate this metric for Amtech Systems, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.04 = US$4.0m ÷ (US$120m - US$20m) (Based on the trailing twelve months to December 2021).
Therefore, Amtech Systems has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 14%.
Above you can see how the current ROCE for Amtech Systems 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 report on analyst forecasts for the company.
The Trend Of ROCE
The fact that Amtech Systems is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 4.0% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Amtech Systems is utilizing 26% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
On a related note, the company's ratio of current liabilities to total assets has decreased to 17%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
What We Can Learn From Amtech Systems' ROCE
Overall, Amtech Systems gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Considering the stock has delivered 3.2% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
If you'd like to know about the risks facing Amtech Systems, we've discovered 1 warning sign that you should be aware of.
While Amtech Systems isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.