If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. That's why when we briefly looked at ASMPT's (HKG:522) ROCE trend, we were very happy with what we saw.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for ASMPT:
0.23 = HK$4.5b ÷ (HK$26b - HK$6.9b) (Based on the trailing twelve months to June 2022).
Therefore, ASMPT has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.
See our latest analysis for ASMPTSEHK:522 Return on Capital Employed September 13th 2022
Above you can see how the current ROCE for ASMPT compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for ASMPT.
What Does the ROCE Trend For ASMPT Tell Us?
We'd be pretty happy with returns on capital like ASMPT. Over the past five years, ROCE has remained relatively flat at around 23% and the business has deployed 51% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.
In short, we'd argue ASMPT has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Yet over the last five years the stock has declined 36%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
ASMPT does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.