Stock Analysis

Melexis (EBR:MELE) Will Be Hoping To Turn Its Returns On Capital Around

ENXTBR:MELE
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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at Melexis (EBR:MELE), it does have a high ROCE right now, but lets see how returns are trending.

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. To calculate this metric for Melexis, this is the formula:

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

0.21 = €86m ÷ (€465m - €58m) (Based on the trailing twelve months to March 2021).

Thus, Melexis has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 6.2%.

Check out our latest analysis for Melexis

roce
ENXTBR:MELE Return on Capital Employed July 18th 2021

Above you can see how the current ROCE for Melexis 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 report for Melexis.

How Are Returns Trending?

In terms of Melexis' historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 38% where it was five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Melexis is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 64% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching Melexis, you might be interested to know about the 1 warning sign that our analysis has discovered.

Melexis is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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