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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Aehr Test Systems (NASDAQ:AEHR) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Aehr Test Systems, this is the formula:

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

0.14 = US$13m ÷ (US$102m - US$9.2m) (Based on the trailing twelve months to February 2024).

So, Aehr Test Systems has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 9.7% it's much better.

In the above chart we have measured Aehr Test Systems' 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 Aehr Test Systems .

How Are Returns Trending?

The fact that Aehr Test Systems is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 14% which is a sight for sore eyes. In addition to that, Aehr Test Systems is employing 499% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 9.0%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Aehr Test Systems has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Aehr Test Systems' ROCE

Long story short, we're delighted to see that Aehr Test Systems' reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last five 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.

Aehr Test Systems does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those don't sit too well with us...

While Aehr Test Systems 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.

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