If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Texas Instruments’ (NASDAQ:TXN) trend of ROCE, we really liked what we saw.
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. The formula for this calculation on Texas Instruments is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.46 = US$11b ÷ (US$26b – US$2.8b) (Based on the trailing twelve months to September 2022).
Thus, Texas Instruments has an ROCE of 46%. In absolute terms that’s a great return and it’s even better than the Semiconductor industry average of 15%.
View our latest analysis for Texas Instruments
In the above chart we have measured Texas Instruments’ 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 report on analyst forecasts for the company.
It’s hard not to be impressed by Texas Instruments’ returns on capital. Over the past five years, ROCE has remained relatively flat at around 46% and the business has deployed 56% more capital into its operations. With returns that high, it’s great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn’t surprise us if the company became a multi-bagger.
In the end, the company has proven it can reinvest it’s capital at high rates of returns, which you’ll remember is a trait of a multi-bagger. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
One more thing: We’ve identified 3 warning signs with Texas Instruments (at least 2 which shouldn’t be ignored) , and understanding these would certainly be useful.
If you’d like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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