U.S. Markets closed

The Trends At Power Integrations (NASDAQ:POWI) That You Should Know About

  • Oops!
    Something went wrong.
    Please try again later.
·3 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Power Integrations (NASDAQ:POWI) 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. To calculate this metric for Power Integrations, this is the formula:

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

0.071 = US$57m ÷ (US$876m - US$66m) (Based on the trailing twelve months to September 2020).

Thus, Power Integrations has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 10%.

View our latest analysis for Power Integrations

roce
roce

In the above chart we have measured Power Integrations' 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 report for Power Integrations.

What Can We Tell From Power Integrations' ROCE Trend?

On the surface, the trend of ROCE at Power Integrations doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.1% from 9.7% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Power Integrations' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Power Integrations is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 149% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 3 warning signs we've spotted with Power Integrations (including 1 which is makes us a bit uncomfortable) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.