If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Melexis (EBR:MELE) looks attractive right now, so lets see what the trend of returns can tell us.
Understanding Return On Capital Employed (ROCE)
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 Melexis, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = €185m ÷ (€905m - €108m) (Based on the trailing twelve months to March 2025).
Therefore, Melexis has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 15%.
View our latest analysis for Melexis
In the above chart we have measured Melexis' 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 Melexis for free.
So How Is Melexis' ROCE Trending?
Melexis deserves to be commended in regards to it's returns. The company has consistently earned 23% for the last five years, and the capital employed within the business has risen 107% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.
In Conclusion...
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. In light of this, the stock has only gained 25% over the last five years for shareholders who have owned the stock in this period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
If you want to continue researching Melexis, you might be interested to know about the 1 warning sign that our analysis has discovered.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
Valuation is complex, but we're here to simplify it.
Discover if Melexis might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
Access Free AnalysisHave feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.