Shareholders Would Enjoy A Repeat Of STMicroelectronics' (EPA:STM) Recent Growth In Returns

What are the early trends we should look for to identify a stock that could 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of STMicroelectronics (EPA:STM) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on STMicroelectronics is:

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

0.21 = US$2.8b ÷ (US$16b - US$3.1b) (Based on the trailing twelve months to April 2022).

Thus, STMicroelectronics has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 12%.

See our latest analysis for STMicroelectronics

In the above chart we have measured STMicroelectronics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for STMicroelectronics.

What Does the ROCE Trend For STMicroelectronics Tell Us?

We like the trends that we're seeing from STMicroelectronics. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 21%. The amount of capital employed has increased too, by 98%. So we're very much inspired by what we're seeing at STMicroelectronics thanks to its ability to profitably reinvest capital.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what STMicroelectronics has. And a remarkable 179% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if STMicroelectronics can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for STMicroelectronics you'll probably want to know about.

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.

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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.