If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. 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 ran our eye over Silicon Motion Technology's (NASDAQ:SIMO) trend of ROCE, we liked what we saw.

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Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Silicon Motion Technology, this is the formula:

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

0.11 = US$94m ÷ (US$1.0b - US$200m) (Based on the trailing twelve months to December 2024).

Therefore, Silicon Motion Technology has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 7.2% it's much better.

Check out our latest analysis for Silicon Motion Technology

Above you can see how the current ROCE for Silicon Motion Technology 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 analyst report for Silicon Motion Technology .

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 47% in that time. 11% is a pretty standard return, and it provides some comfort knowing that Silicon Motion Technology has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Our Take On Silicon Motion Technology's ROCE

In the end, Silicon Motion Technology has proven its ability to adequately reinvest capital at good rates of return. However, over the last five years, the stock has only delivered a 2.3% return to shareholders who held over that period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

One more thing to note, we've identified 1 warning sign with Silicon Motion Technology and understanding it should be part of your investment process.

While Silicon Motion Technology 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.