To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of ON Semiconductor (NASDAQ:ON) looks great, so lets see what the trend can tell us.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for ON Semiconductor, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = US$2.5b ÷ (US$13b - US$2.1b) (Based on the trailing twelve months to March 2024).
Thus, ON Semiconductor has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 9.8% earned by companies in a similar industry.
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?
Investors would be pleased with what's happening at ON Semiconductor. Over the last five years, returns on capital employed have risen substantially to 22%. The amount of capital employed has increased too, by 82%. So we're very much inspired by what we're seeing at ON Semiconductor thanks to its ability to profitably reinvest capital.
The Key Takeaway
All in all, it's terrific to see that ON Semiconductor is reaping the rewards from prior investments and is growing its capital base. And a remarkable 284% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.
While ON Semiconductor looks impressive, no company is worth an infinite price. The intrinsic value infographic for ON helps visualize whether it is currently trading for a fair price.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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.