Returns Are Gaining Momentum At NXP Semiconductors (NASDAQ:NXPI)
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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, NXP Semiconductors (NASDAQ:NXPI) looks quite promising in regards to its trends of return on capital.
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. To calculate this metric for NXP Semiconductors, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = US$1.7b ÷ (US$21b - US$2.3b) (Based on the trailing twelve months to July 2021).
So, NXP Semiconductors has an ROCE of 9.1%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 13%.
See our latest analysis for NXP Semiconductors
Above you can see how the current ROCE for NXP Semiconductors compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for NXP Semiconductors.
So How Is NXP Semiconductors' ROCE Trending?
NXP Semiconductors' ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 251% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line On NXP Semiconductors' ROCE
In summary, we're delighted to see that NXP Semiconductors 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 151% 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.
NXP Semiconductors does have some risks though, and we've spotted 2 warning signs for NXP Semiconductors that you might be interested in.
While NXP Semiconductors isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.
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