If you're not sure where to start in your search for the next multi-bagger, there are a few key trends to look out for. In particular, you should look out for two things: first, an increasing return on invested capital (ROCE), and second, a growing amount of invested capital. Ultimately, this points to a company that is reinvesting profits at growing rates of return. However, when we looked at Silicon Motion Technology (NASDAQ:SIMO), it didn't seem to check all of these boxes.
What is Return on Invested Capital (ROCE)?
For those who don't know, ROCE is the ratio of a company's annual pre-tax profit (revenue) to the capital employed in the business. Analysts use the following formula to calculate Silicon Motion Technology's ROCE:
Return on Invested Capital = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.095 = US$81m ÷ (US$1b – US$185m) (Based on the trailing twelve months to June 2024).
Silicon Motion Technology therefore has an ROCE of 9.5% – a low return in absolute terms, but in line with the Semiconductor industry average of 9.0%.
View our latest analysis for Silicon Motion Technology
NasdaqGS:SIMO Return on Invested Capital August 29, 2024
In the chart above we've measured Silicon Motion Technology's prior ROCE against its past performance, but the future is arguably more important: If you'd like, you can see forecasts from the analysts covering Silicon Motion Technology for free.
What does Silicon Motion Technology's ROCE trend indicate?
In terms of Silicon Motion Technology's historical ROCE trend, there's nothing particularly noteworthy about it. The company has consistently generated 9.5% profits over the past five years, during which time capital employed within the business has grown by 40%. This low ROCE does not inspire confidence at the moment, and the increase in capital employed makes it clear that the company is not allocating funds to higher-return investments.
Silicon Motion Technology's ROCE conclusion
In conclusion, Silicon Motion Technology has been putting capital into the business but has not seen an increasing return on that capital. However, for long term shareholders, the stock has delivered an impressive return of 114% over the past five years, and the market appears optimistic about the company's future. After all, if fundamental trends continue, it's not likely we're expecting the company to grow many multiples in the future.
One more thing to note, we've discovered that Silicon Motion Technology has 1 warning sign , and understanding this should be part of your investment process.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
