The Return Trends At X-FAB Silicon Foundries (EPA:XFAB) Look Promising

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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, we've noticed some promising trends at X-FAB Silicon Foundries (EPA:XFAB) so let's look a bit deeper.

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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 X-FAB Silicon Foundries, this is the formula:

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

0.054 = US$78m ÷ (US$1.9b - US$494m) (Based on the trailing twelve months to June 2025).

Thus, X-FAB Silicon Foundries has an ROCE of 5.4%. On its own, that's a low figure but it's around the 5.9% average generated by the Semiconductor industry.

See 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 to see what analysts are forecasting going forward, you should check out our free analyst report for X-FAB Silicon Foundries .

How Are Returns Trending?

The fact that X-FAB Silicon Foundries is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 5.4% on its capital. In addition to that, X-FAB Silicon Foundries is employing 101% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 25% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line On X-FAB Silicon Foundries' ROCE

Long story short, we're delighted to see that X-FAB Silicon Foundries' reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 85% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if X-FAB Silicon Foundries can keep these trends up, it could have a bright future ahead.

On a final note, we found 2 warning signs for X-FAB Silicon Foundries (1 is a bit concerning) you should be aware of.

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.