Here's What To Make Of Silicom's (NASDAQ:SILC) Decelerating Rates Of Return
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Silicom's (NASDAQ:SILC) trend of ROCE, we liked what we saw.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Silicom is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$21m ÷ (US$218m - US$21m) (Based on the trailing twelve months to June 2023).
So, Silicom has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Communications industry.
View our latest analysis for Silicom
In the above chart we have measured Silicom's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 35% more capital in the last five years, and the returns on that capital have remained stable at 11%. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. 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.
What We Can Learn From Silicom's ROCE
To sum it up, Silicom has simply been reinvesting capital steadily, at those decent rates of return. Yet over the last five years the stock has declined 29%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
If you'd like to know about the risks facing Silicom, we've discovered 1 warning sign that you should be aware of.
While Silicom 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.
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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.
