Why The 24% Return On Capital At ON Semiconductor (NASDAQ:ON) Should Have Your Attention
If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. And in light of that, the trends we're seeing at ON Semiconductor's (NASDAQ:ON) look very promising so lets take a look.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for ON Semiconductor:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = US$2.6b ÷ (US$13b - US$2.2b) (Based on the trailing twelve months to December 2023).
Thus, ON Semiconductor has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 11%.
View our latest analysis for ON Semiconductor
In the above chart we have measured ON Semiconductor'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 analyst report for ON Semiconductor .
What Does the ROCE Trend For ON Semiconductor Tell Us?
The trends we've noticed at ON Semiconductor are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 24%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 80%. So we're very much inspired by what we're seeing at ON Semiconductor thanks to its ability to profitably reinvest capital.
The Bottom Line
In summary, it's great to see that ON Semiconductor can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if ON Semiconductor can keep these trends up, it could have a bright future ahead.
If you'd like to know about the risks facing ON Semiconductor, we've discovered 1 warning sign that you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.
