The Returns At X-FAB Silicon Foundries (EPA:XFAB) Aren't Growing

What trends should we look for it we want to identify stocks that can 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. However, after briefly looking over the numbers, we don't think X-FAB Silicon Foundries (EPA:XFAB) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.084 = US$63m ÷ (US$882m - US$124m) (Based on the trailing twelve months to September 2021).

So, X-FAB Silicon Foundries has an ROCE of 8.4%. On its own, that's a low figure but it's around the 10% average generated by the Semiconductor industry.

See our latest analysis for X-FAB Silicon Foundries

In the above chart we have measured X-FAB Silicon Foundries' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at X-FAB Silicon Foundries. Over the past five years, ROCE has remained relatively flat at around 8.4% and the business has deployed 71% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From X-FAB Silicon Foundries' ROCE

Long story short, while X-FAB Silicon Foundries has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 90% over the last three years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 1 warning sign with X-FAB Silicon Foundries and understanding this should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.