What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Microchip Technology (NASDAQ:MCHP) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Microchip Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.19 = US$2.6b ÷ (US$16b – US$2.5b) (Based on the trailing twelve months to March 2024).
So, Microchip Technology has an ROCE of 19%. On its own, that’s a standard return, however it’s much better than the 9.5% generated by the Semiconductor industry.
Check out our latest analysis for Microchip Technology
In the above chart we have measured Microchip Technology’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering Microchip Technology for free.
How Are Returns Trending?
Microchip Technology is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 309% whilst employing roughly the same amount of capital. So it’s likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn’t changed considerably. The company is doing well in that sense, and it’s worth investigating what the management team has planned for long term growth prospects.
In Conclusion…
In summary, we’re delighted to see that Microchip Technology has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 132% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing to note, we’ve identified 2 warning signs with Microchip Technology and understanding these should be part of your investment process.
While Microchip Technology 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
