Returns On Capital Are Showing Encouraging Signs At Semtech (NASDAQ:SMTC)

By
Simply Wall St
Published
April 18, 2022
NasdaqGS:SMTC
Source: Shutterstock

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Semtech (NASDAQ:SMTC) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

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 Semtech:

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

0.14 = US$145m ÷ (US$1.1b - US$128m) (Based on the trailing twelve months to January 2022).

Therefore, Semtech has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Semiconductor industry average of 15%.

Check out our latest analysis for Semtech

roce
NasdaqGS:SMTC Return on Capital Employed April 18th 2022

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

What Does the ROCE Trend For Semtech Tell Us?

Semtech's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 111% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line On Semtech's ROCE

In summary, we're delighted to see that Semtech has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 84% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 2 warning signs facing Semtech that you might find interesting.

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.

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