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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Silicon Motion Technology (NASDAQ:SIMO), we don't think it's current trends fit the mold of a multi-bagger.

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. 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)

0.095 = US$81m ÷ (US$1.0b - US$185m) (Based on the trailing twelve months to June 2024).

Thus, Silicon Motion Technology has an ROCE of 9.5%. On its own, that's a low figure but it's around the 9.0% average generated by the Semiconductor industry.

Check out our latest analysis for Silicon Motion Technology

In the above chart we have measured Silicon Motion Technology'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 Silicon Motion Technology .

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Silicon Motion Technology. Over the past five years, ROCE has remained relatively flat at around 9.5% and the business has deployed 40% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Silicon Motion Technology's ROCE

As we've seen above, Silicon Motion Technology's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 47% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 1 warning sign for Silicon Motion Technology you'll probably want to know about.

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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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.