If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Advanced Energy Industries (NASDAQ:AEIS) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Advanced Energy Industries is:

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

0.035 = US$67m ÷ (US$2.2b - US$292m) (Based on the trailing twelve months to September 2024).

So, Advanced Energy Industries has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Electronic industry average of 10%.

Above you can see how the current ROCE for Advanced Energy Industries 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 analyst report for Advanced Energy Industries .

So How Is Advanced Energy Industries' ROCE Trending?

On the surface, the trend of ROCE at Advanced Energy Industries doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.5% from 5.1% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

In summary, we're somewhat concerned by Advanced Energy Industries' diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 75% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Advanced Energy Industries does have some risks though, and we've spotted 3 warning signs for Advanced Energy Industries that you might be interested in.

While Advanced Energy Industries 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.