If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at ON Semiconductor's (NASDAQ:ON) look very promising so lets take a look.
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 ON Semiconductor:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = US$2.8b ÷ (US$12b - US$2.6b) (Based on the trailing twelve months to March 2023).
Thus, ON Semiconductor has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 13%.
In the above chart we have measured ON Semiconductor's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering ON Semiconductor here for free.
SWOT Analysis for ON Semiconductor
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Earnings growth over the past year is below its 5-year average.
- Annual revenue is forecast to grow faster than the American market.
- Good value based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow slower than the American market.
What Can We Tell From ON Semiconductor's ROCE Trend?
Investors would be pleased with what's happening at ON Semiconductor. The data shows that returns on capital have increased substantially over the last five years to 28%. Basically the business is earning more per dollar of capital invested and in addition to that, 82% more capital is being employed now too. So we're very much inspired by what we're seeing at ON Semiconductor thanks to its ability to profitably reinvest capital.
The Bottom Line On ON Semiconductor's ROCE
In summary, it's great to see that ON Semiconductor can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 220% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
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.
Valuation is complex, but we're helping make it simple.
Find out whether ON Semiconductor is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.