Returns On Capital At Silicon Motion Technology (NASDAQ:SIMO) Have Hit The Brakes

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Silicon Motion Technology's (NASDAQ:SIMO) ROCE trend, we were pretty happy with what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.10 = US$89m ÷ (US$1.0b - US$176m) (Based on the trailing twelve months to September 2024).

Thus, Silicon Motion Technology has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Semiconductor industry average of 8.6%.

Check out 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 analyst report for Silicon Motion Technology .

The Trend Of ROCE

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 10% and the business has deployed 49% more capital into its operations. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line On Silicon Motion Technology's ROCE

The main thing to remember is that Silicon Motion Technology has proven its ability to continually reinvest at respectable rates of return. In light of this, the stock has only gained 32% over the last five years for shareholders who have owned the stock in this period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

Silicon Motion Technology does have some risks though, and we've spotted 1 warning sign for Silicon Motion Technology that you might be interested in.

While Silicon Motion Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.