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. With that in mind, we've noticed some promising trends at MACOM Technology Solutions Holdings (NASDAQ:MTSI) so let's look a bit deeper.

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 MACOM Technology Solutions Holdings is:

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

0.045 = US$74m ÷ (US$1.8b - US$108m) (Based on the trailing twelve months to September 2024).

Thus, MACOM Technology Solutions Holdings has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 8.5%.

Check out our latest analysis for MACOM Technology Solutions Holdings

In the above chart we have measured MACOM Technology Solutions Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering MACOM Technology Solutions Holdings for free.

How Are Returns Trending?

The fact that MACOM Technology Solutions Holdings is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 4.5% which is a sight for sore eyes. In addition to that, MACOM Technology Solutions Holdings is employing 60% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Key Takeaway

Long story short, we're delighted to see that MACOM Technology Solutions Holdings' reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 432% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.