If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. With that in mind, we've noticed some promising trends at Veeco Instruments (NASDAQ:VECO) so let's look a bit deeper.
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. Analysts use this formula to calculate it for Veeco Instruments:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.069 = US$70m ÷ (US$1.2b - US$218m) (Based on the trailing twelve months to December 2023).
Thus, Veeco Instruments has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 9.7%.
NasdaqGS:VECO Return on Capital Employed April 8th 2024
Above you can see how the current ROCE for Veeco Instruments 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 Veeco Instruments for free.
What Does the ROCE Trend For Veeco Instruments Tell Us?
Veeco Instruments has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 6.9% on its capital. And unsurprisingly, like most companies trying to break into the black, Veeco Instruments is utilizing 36% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In Conclusion...
In summary, it's great to see that Veeco Instruments has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Veeco Instruments can keep these trends up, it could have a bright future ahead.
One more thing to note, we've identified 2 warning signs with Veeco Instruments and understanding these should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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