Silicon Motion Technology (NASDAQ:SIMO) Knows How To Allocate Capital

By
Simply Wall St
Published
October 11, 2021
NasdaqGS:SIMO
Source: Shutterstock

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Ergo, when we looked at the ROCE trends at Silicon Motion Technology (NASDAQ:SIMO), we liked what we saw.

Understanding Return On Capital Employed (ROCE)

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 Silicon Motion Technology:

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

0.22 = US$149m ÷ (US$859m - US$183m) (Based on the trailing twelve months to June 2021).

Thus, Silicon Motion Technology has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 13%.

See our latest analysis for Silicon Motion Technology

roce
NasdaqGS:SIMO Return on Capital Employed October 11th 2021

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, you can check out the forecasts from the analysts covering Silicon Motion Technology here for free.

What The Trend Of ROCE Can Tell Us

Silicon Motion Technology deserves to be commended in regards to it's returns. The company has employed 63% more capital in the last five years, and the returns on that capital have remained stable at 22%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Silicon Motion Technology can keep this up, we'd be very optimistic about its future.

The Key Takeaway

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. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

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

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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Simply Wall St

Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.