When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Power Integrations (NASDAQ:POWI), we weren't too upbeat about how things were going.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Power Integrations:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = US$24m ÷ (US$814m - US$55m) (Based on the trailing twelve months to March 2025).
So, Power Integrations has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 9.2%.
View our latest analysis for Power Integrations
Above you can see how the current ROCE for Power Integrations 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 Power Integrations .
What Does the ROCE Trend For Power Integrations Tell Us?
In terms of Power Integrations' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 7.4% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Power Integrations becoming one if things continue as they have.
The Bottom Line
In summary, it's unfortunate that Power Integrations is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 15% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Power Integrations does have some risks though, and we've spotted 2 warning signs for Power Integrations that you might be interested in.
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.
Valuation is complex, but we're here to simplify it.
Discover if Power Integrations might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
Access Free AnalysisHave feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.