To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, SiTime (NASDAQ:SITM) looks quite promising in regards to its trends of return on capital.
Understanding 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 SiTime, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = US$33m ÷ (US$738m - US$35m) (Based on the trailing twelve months to September 2022).
Therefore, SiTime has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 15%.
Check out our latest analysis for SiTime
NasdaqGM:SITM Return on Capital Employed January 12th 2023
Above you can see how the current ROCE for SiTime compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for SiTime.
What Does the ROCE Trend For SiTime Tell Us?
SiTime has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses four years ago, but now it's earning 4.7% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, SiTime is utilizing 4,408% more capital than it was four years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
On a related note, the company's ratio of current liabilities to total assets has decreased to 4.7%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
The Bottom Line
Overall, SiTime gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 320% to shareholders over the last three 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.
SiTime does have some risks, we noticed 4 warning signs (and 1 which is significant) we think you should know about.
While SiTime isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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