Returns On Capital Signal Tricky Times Ahead For X-FAB Silicon Foundries (EPA:XFAB)

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Having said that, from a first glance at X-FAB Silicon Foundries (EPA:XFAB) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for X-FAB Silicon Foundries:

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

0.039 = US$29m ÷ (US$855m - US$116m) (Based on the trailing twelve months to June 2021).

So, X-FAB Silicon Foundries has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 7.4%.

View our latest analysis for X-FAB Silicon Foundries

Above you can see how the current ROCE for X-FAB Silicon Foundries compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering X-FAB Silicon Foundries here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at X-FAB Silicon Foundries doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.9% from 7.8% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On X-FAB Silicon Foundries' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that X-FAB Silicon Foundries is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 18% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

X-FAB Silicon Foundries does have some risks though, and we've spotted 1 warning sign for X-FAB Silicon Foundries that you might be interested in.

While X-FAB Silicon Foundries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.
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