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Has Skyworks Solutions (NASDAQ:SWKS) Got What It Takes To Become A Multi-Bagger?

Simply Wall St
·3 mins read

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There are a few key trends to look for if we want to identify the next 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Skyworks Solutions (NASDAQ:SWKS) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Skyworks Solutions is:

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

0.19 = US$875m ÷ (US$5.0b - US$362m) (Based on the trailing twelve months to March 2020).

So, Skyworks Solutions has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 9.6% it's much better.

Check out our latest analysis for Skyworks Solutions

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Above you can see how the current ROCE for Skyworks Solutions 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.

What Can We Tell From Skyworks Solutions' ROCE Trend?

When we looked at the ROCE trend at Skyworks Solutions, we didn't gain much confidence. Around five years ago the returns on capital were 27%, but since then they've fallen to 19%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Skyworks Solutions' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Skyworks Solutions have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 59% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Like most companies, Skyworks Solutions does come with some risks, and we've found 2 warning signs that you should be aware of.

While Skyworks Solutions 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.