SEMITEC (TSE:6626) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in SEMITEC's (TSE:6626) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on SEMITEC is:

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

0.16 = JP¥3.9b ÷ (JP¥29b - JP¥4.1b) (Based on the trailing twelve months to September 2024).

Thus, SEMITEC has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 9.3% it's much better.

See our latest analysis for SEMITEC

Above you can see how the current ROCE for SEMITEC 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 SEMITEC .

What Does the ROCE Trend For SEMITEC Tell Us?

The trends we've noticed at SEMITEC are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 16%. The amount of capital employed has increased too, by 111%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, SEMITEC has decreased current liabilities to 14% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From SEMITEC's ROCE

To sum it up, SEMITEC has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 6626 on our platform that is definitely worth checking out.

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.