Yahoo Finance Skyworks Solutions (NASDAQ:SWKS) May Have Issues Allocating Its Capital
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, while the ROCE is currently high for Skyworks Solutions (NASDAQ:SWKS), we aren't jumping out of our chairs because returns are decreasing.
Understanding Return On Capital Employed (ROCE)
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 Skyworks Solutions is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$1.6b ÷ (US$8.9b - US$1.2b) (Based on the trailing twelve months to September 2022).
Thus, Skyworks Solutions has an ROCE of 20%. 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 Skyworks Solutions
Above you can see how the current ROCE for Skyworks Solutions compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Skyworks Solutions here for free.
The Trend Of ROCE
In terms of Skyworks Solutions' historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, five years ago it was 30%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line
Bringing it all together, while we're somewhat encouraged by Skyworks Solutions' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 28% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you want to continue researching Skyworks Solutions, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.
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