Himax Technologies (NASDAQ:HIMX) Could Become A Multi-Bagger

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. And in light of that, the trends we're seeing at Himax Technologies' (NASDAQ:HIMX) look very promising so lets take 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 Himax Technologies, this is the formula:

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

0.26 = US$258m ÷ (US$1.7b - US$694m) (Based on the trailing twelve months to December 2022).

Therefore, Himax Technologies has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 15%.

See our latest analysis for Himax Technologies

Above you can see how the current ROCE for Himax Technologies 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 Himax Technologies here for free.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Himax Technologies. The data shows that returns on capital have increased substantially over the last five years to 26%. The amount of capital employed has increased too, by 119%. 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.

Another thing to note, Himax Technologies has a high ratio of current liabilities to total assets of 41%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Himax Technologies' ROCE

In summary, it's great to see that Himax Technologies can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has only returned 14% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

If you want to know some of the risks facing Himax Technologies we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.