If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, RoodMicrotec (AMS:ROOD) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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 RoodMicrotec:

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

0.17 = €2.5m ÷ (€17m - €2.7m) (Based on the trailing twelve months to December 2022).

Therefore, RoodMicrotec has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Semiconductor industry average of 15%.

Check out our latest analysis for RoodMicrotec

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how RoodMicrotec has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

RoodMicrotec is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The amount of capital employed has increased too, by 40%. So we're very much inspired by what we're seeing at RoodMicrotec thanks to its ability to profitably reinvest capital.

Our Take On RoodMicrotec's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what RoodMicrotec has. Astute investors may have an opportunity here because the stock has declined 29% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing, we've spotted 1 warning sign facing RoodMicrotec that you might find interesting.

While RoodMicrotec isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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