There Are Reasons To Feel Uneasy About Texas Instruments' (NASDAQ:TXN) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. 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 Texas Instruments (NASDAQ:TXN), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

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. The formula for this calculation on Texas Instruments is:

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

0.30 = US$8.6b ÷ (US$31b - US$2.7b) (Based on the trailing twelve months to June 2023).

So, Texas Instruments has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 13%.

View our latest analysis for Texas Instruments

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

How Are Returns Trending?

On the surface, the trend of ROCE at Texas Instruments doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 39%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Texas Instruments' ROCE

Bringing it all together, while we're somewhat encouraged by Texas Instruments' reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 83% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Texas Instruments does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.