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Returns On Capital Are Showing Encouraging Signs At MACOM Technology Solutions Holdings (NASDAQ:MTSI)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 looked at MACOM Technology Solutions Holdings (NASDAQ:MTSI) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for MACOM Technology Solutions Holdings:

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

0.046 = US$73m ÷ (US$1.7b - US$109m) (Based on the trailing twelve months to March 2024).

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Thus, MACOM Technology Solutions Holdings has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 9.7%.

See our latest analysis for MACOM Technology Solutions Holdings

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Above you can see how the current ROCE for MACOM Technology Solutions Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for MACOM Technology Solutions Holdings .

What Can We Tell From MACOM Technology Solutions Holdings' ROCE Trend?

Shareholders will be relieved that MACOM Technology Solutions Holdings has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.6%, which is always encouraging. While returns have increased, the amount of capital employed by MACOM Technology Solutions Holdings has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Key Takeaway

As discussed above, MACOM Technology Solutions Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 568% 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.

Like most companies, MACOM Technology Solutions Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.