If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Ichor Holdings’ (NASDAQ:ICHR) 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. To calculate this metric for Ichor Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = US$73m ÷ (US$822m – US$198m) (Based on the trailing twelve months to June 2021).
Thus, Ichor Holdings has an ROCE of 12%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Semiconductor industry average of 13%.
NasdaqGS:ICHR Return on Capital Employed September 26th 2021
In the above chart we have measured Ichor Holdings’ prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Ichor Holdings.
What The Trend Of ROCE Can Tell Us
We like the trends that we’re seeing from Ichor Holdings. Over the last five years, returns on capital employed have risen substantially to 12%. The amount of capital employed has increased too, by 312%. 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.
The Key Takeaway
To sum it up, Ichor Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
Like most companies, Ichor Holdings does come with some risks, and we’ve found 1 warning sign that you should be aware of.
While Ichor Holdings isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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