There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at MACOM Technology Solutions Holdings (NASDAQ:MTSI) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on MACOM Technology Solutions Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.093 = US$134m ÷ (US$1.6b – US$211m) (Based on the trailing twelve months to June 2023).
Therefore, MACOM Technology Solutions Holdings has an ROCE of 9.3%. Ultimately, that’s a low return and it under-performs the Semiconductor industry average of 12%.
Above you can see how the current ROCE for MACOM Technology Solutions Holdings compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
Shareholders will be relieved that MACOM Technology Solutions Holdings has broken into profitability. The company now earns 9.3% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by MACOM Technology Solutions Holdings has remained flat over the period. With no noticeable increase in capital employed, it’s worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.
The Bottom Line
In summary, we’re delighted to see that MACOM Technology Solutions Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 280% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Like most companies, MACOM Technology Solutions Holdings does come with some risks, and we’ve found 2 warning signs that you should be aware of.
While MACOM Technology Solutions Holdings 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.
Valuation is complex, but we’re helping make it simple.
Find out whether MACOM Technology Solutions Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.