To find multi-bagger stock, what are the underlying trends we need to look for in a business? Among other things, we’ll want to see two things; first, a growth return on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. Basically, it means that a business has profitable initiatives that it can keep reinvesting in, which is a hallmark of a dialing machine. That said, from the first glance at Super microcomputer (NASDAQ: SMCI) We are not jumping from our chairs on the yield trend, but taking a closer look.
Understanding Return on Capital Employed (ROCE)
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. Analysts use this formula to calculate it for Super Micro Computer:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.092 = US $ 112 million ÷ (US $ 2.0 billion – US $ 782 million) (Based on the last twelve months up to March 2021).
Therefore, Super Micro Computer has a ROCE of 9.2%. In absolute terms, that’s a low return, but it’s far better than the tech industry average of 6.1%.
Check out our latest review for Super Micro Computer
In the graph above, we measured Super Micro Computer’s past ROCE against its past performance, but the future is arguably more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Super Micro Computer.
What the ROCE trend can tell us
On the surface, the ROCE trend at Super Micro Computer does not inspire confidence. Over the past five years, return on capital has declined to 9.2% from 16% five years ago. However, it looks like Super Micro Computer is reinvesting for long-term growth, as although capital employed has increased, the company’s sales haven’t changed much in the past 12 months. It may take some time for the business to begin to see a change in the benefits of these investments.
Our opinion on the ROCE of Super Micro Computer
Putting all of this together, although we are somewhat encouraged by Super Micro Computer’s reinvestment in its own business, we are aware that the returns are diminishing. And since the stock has only returned 40% in the past five years to shareholders, one could argue that they are aware of these gloomy trends. Therefore, if you are looking for a multi-bagger, we think you would have better luck elsewhere.
If you want to continue your research on Super Micro Computer, you might be interested in knowing the 1 warning sign that our analysis found.
If you want to look for solid businesses with great income, check out this free list of companies with good balance sheets and impressive returns on equity.
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