If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Tower Semiconductor (NASDAQ:TSEM), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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. Analysts use this formula to calculate it for Tower Semiconductor:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = US$177m ÷ (US$3.0b - US$324m) (Based on the trailing twelve months to March 2024).
Thus, Tower Semiconductor has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 9.7%.
In the above chart we have measured Tower Semiconductor's 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 analyst report for Tower Semiconductor .
The Trend Of ROCE
On the surface, the trend of ROCE at Tower Semiconductor doesn't inspire confidence. Around five years ago the returns on capital were 9.3%, but since then they've fallen to 6.7%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
What We Can Learn From Tower Semiconductor's ROCE
We're a bit apprehensive about Tower Semiconductor because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 153% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
One more thing: We've identified 2 warning signs with Tower Semiconductor (at least 1 which can't be ignored) , and understanding them would certainly be useful.
While Tower Semiconductor isn't earning the highest return, check out this free list of companies that are 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.