Capital Investment Trends At Silicon Motion Technology (NASDAQ:SIMO) Look Strong

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. That's why when we briefly looked at Silicon Motion Technology's (NASDAQ:SIMO) ROCE trend, we were very happy with what we saw.

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 Silicon Motion Technology:

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

0.36 = US$246m ÷ (US$971m - US$282m) (Based on the trailing twelve months to December 2021).

Therefore, Silicon Motion Technology has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 15%.

View our latest analysis for Silicon Motion Technology

In the above chart we have measured Silicon Motion Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Silicon Motion Technology.

What Does the ROCE Trend For Silicon Motion Technology Tell Us?

It's hard not to be impressed by Silicon Motion Technology's returns on capital. The company has employed 50% more capital in the last five years, and the returns on that capital have remained stable at 36%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Silicon Motion Technology can keep this up, we'd be very optimistic about its future.

In Conclusion...

In summary, we're delighted to see that Silicon Motion Technology has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 88% return if they held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

One more thing, we've spotted 1 warning sign facing Silicon Motion Technology that you might find interesting.

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.

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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.