Investors Will Want EMCORE's (NASDAQ:EMKR) Growth In ROCE To Persist

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in EMCORE's (NASDAQ:EMKR) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for EMCORE:

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

0.13 = US$21m ÷ (US$192m - US$28m) (Based on the trailing twelve months to December 2021).

Therefore, EMCORE has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 7.3% generated by the Communications industry.

View our latest analysis for EMCORE

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

How Are Returns Trending?

The trends we've noticed at EMCORE are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 13%. The amount of capital employed has increased too, by 47%. 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.

Our Take On EMCORE's ROCE

To sum it up, EMCORE has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 60% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for EMCORE (of which 2 shouldn't be ignored!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.