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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at NXP Semiconductors (NASDAQ:NXPI) and its trend of ROCE, we really liked what we saw.
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 NXP Semiconductors, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$3.5b ÷ (US$24b - US$3.1b) (Based on the trailing twelve months to December 2024).
Therefore, NXP Semiconductors has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 7.2% it's much better.
See our latest analysis for NXP Semiconductors
In the above chart we have measured NXP Semiconductors' 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 NXP Semiconductors .
What Can We Tell From NXP Semiconductors' ROCE Trend?
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 369% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line
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 103% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.