Capital investment trends at Silicon Motion Technology (NASDAQ:SIMO) appear strong

If we want to find a stock that could multiply over the long term, what are the underlying trends we should be looking for? Among other things, we will want to see two things; first, growth to return to on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. Therefore, when we briefly examined Silicon Motion Technology (NASDAQ:SIMO) ROCE trend, we were very pleased with what we saw.

What is return on capital employed (ROCE)?

For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its 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)

0.36 = $246 million ÷ ($971 million – $282 million) (Based on the last twelve months to December 2021).

So, Silicon Motion Technology posted a ROCE of 36%. In absolute terms, that’s excellent performance and even better than the semiconductor industry average of 15%.

Check out our latest analysis for Silicon Motion Technology

NasdaqGS: SIMO Return on Capital Employed April 29, 2022

In the chart above, we measured Silicon Motion Technology’s past ROCE against its past performance, but the future is arguably more important. If you want to see what analysts predict for the future, you should check out our free report for Silicon Motion Technology.

What does the ROCE trend tell us for Silicon Motion technology?

It’s hard not to be impressed with Silicon Motion Technology’s returns on investment. The company has employed 50% more capital over the past five years, and the return on that capital has remained stable at 36%. Such returns are the envy of most companies and given that they have repeatedly reinvested at these rates, even better. If Silicon Motion Technology can continue like this, we would be very optimistic about its future.

In conclusion…

In summary, we are pleased to see that Silicon Motion Technology has accumulated returns by reinvesting at consistently high rates of return, as these are common characteristics of a multi-bagger. So it’s no surprise that shareholders have earned a respectable 88% return if they’ve held for the past five years. So while the stock may be more “expensive” than it used to be, we believe the strong fundamentals warrant this stock for further research.

One more thing we spotted 1 warning sign facing Silicon Motion Technology that might interest you.

High yields are a key ingredient to strong performance, so check out our free list of stocks generating high returns on equity with strong balance sheets.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.