Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at Microchip Technology's (NASDAQ:MCHP) look very promising so lets take a look.

What Is Return On Capital Employed (ROCE)?

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 Microchip Technology:

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

0.26 = US$3.5b ÷ (US$17b - US$3.4b) (Based on the trailing twelve months to September 2023).

Thus, Microchip Technology has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

Check out our latest analysis for Microchip Technology

In the above chart we have measured Microchip Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Microchip Technology.

What Does the ROCE Trend For Microchip Technology Tell Us?

We're pretty happy with how the ROCE has been trending at Microchip Technology. The figures show that over the last five years, returns on capital have grown by 306%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 20% less capital than it was five years ago. Microchip Technology may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

In Conclusion...

From what we've seen above, Microchip Technology has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a staggering 141% 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.

If you'd like to know more about Microchip Technology, we've spotted 2 warning signs, and 1 of them is potentially serious.

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.