There's Been No Shortage Of Growth Recently For SiTime's (NASDAQ:SITM) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at SiTime (NASDAQ:SITM) and its trend of ROCE, we really liked 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 SiTime:

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

0.047 = US$33m ÷ (US$738m - US$35m) (Based on the trailing twelve months to September 2022).

Therefore, SiTime has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 17%.

See our latest analysis for SiTime

In the above chart we have measured SiTime'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 SiTime here for free.

How Are Returns Trending?

We're delighted to see that SiTime is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses four years ago, but now it's earning 4.7% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, SiTime is utilizing 4,408% more capital than it was four years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, SiTime has decreased current liabilities to 4.7% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that SiTime has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From SiTime's ROCE

In summary, it's great to see that SiTime has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 369% total return over the last three years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if SiTime can keep these trends up, it could have a bright future ahead.

On a final note, we found 4 warning signs for SiTime (1 is potentially serious) you should be aware of.

While SiTime 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.