NeoPhotonics' (NYSE:NPTN) Returns Have Hit A Wall

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at NeoPhotonics (NYSE:NPTN), it didn't seem to tick all of these boxes.

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 NeoPhotonics, this is the formula:

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

0.027 = US$6.3m ÷ (US$324m - US$89m) (Based on the trailing twelve months to December 2020).

Therefore, NeoPhotonics has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 9.8%.

See our latest analysis for NeoPhotonics

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

What Does the ROCE Trend For NeoPhotonics Tell Us?

Over the past five years, NeoPhotonics' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if NeoPhotonics doesn't end up being a multi-bagger in a few years time.

Our Take On NeoPhotonics' ROCE

We can conclude that in regards to NeoPhotonics' returns on capital employed and the trends, there isn't much change to report on. Unsurprisingly then, the total return to shareholders over the last five years has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing, we've spotted 3 warning signs facing NeoPhotonics that you might find interesting.

While NeoPhotonics 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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