Semtech (NASDAQ:SMTC) Might Have The Makings Of A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Semtech (NASDAQ:SMTC) so let's look a bit deeper.

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Understanding 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. To calculate this metric for Semtech, this is the formula:

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

0.079 = US$94m ÷ (US$1.4b - US$236m) (Based on the trailing twelve months to April 2025).

Thus, Semtech has an ROCE of 7.9%. In absolute terms, that's a low return but it's around the Semiconductor industry average of 8.9%.

Check out our latest analysis for Semtech

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 to see what analysts are forecasting going forward, you should check out our free analyst report for Semtech .

The Trend Of ROCE

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 7.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 28% more capital is being employed now too. So we're very much inspired by what we're seeing at Semtech thanks to its ability to profitably reinvest capital.

The Bottom Line

In summary, it's great to see that Semtech can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Astute investors may have an opportunity here because the stock has declined 19% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

One final note, you should learn about the 2 warning signs we've spotted with Semtech (including 1 which doesn't sit too well with us) .

While Semtech isn't earning the highest return, check out this free list of companies that are 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.