Under The Bonnet, Melexis' (EBR:MELE) Returns Look Impressive

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Melexis' (EBR:MELE) look very promising so lets take a look.

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Understanding Return On Capital Employed (ROCE)

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)

0.28 = €220m ÷ (€894m - €104m) (Based on the trailing twelve months to December 2024).

Therefore, Melexis has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 12%.

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?

Investors would be pleased with what's happening at Melexis. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 28%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 117%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Melexis' ROCE

To sum it up, Melexis has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 5.8% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Like most companies, Melexis does come with some risks, and we've found 2 warning signs that you should be aware of.

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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.