Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in NXP Semiconductors' (NASDAQ:NXPI) returns on capital, so let's have a look.

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

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. Analysts use this formula to calculate it for NXP Semiconductors:

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

0.17 = US$3.5b ÷ (US$24b - US$3.1b) (Based on the trailing twelve months to December 2024).

Therefore, NXP Semiconductors has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 7.1% generated by the Semiconductor industry.

View our latest analysis for NXP Semiconductors

In the above chart we have measured NXP Semiconductors' 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 analyst report for NXP Semiconductors .

What Can We Tell From NXP Semiconductors' ROCE Trend?

NXP Semiconductors is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 369% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

Our Take On NXP Semiconductors' ROCE

In summary, we're delighted to see that NXP Semiconductors has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 134% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if NXP Semiconductors can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with NXP Semiconductors and understanding it should be part of your investment process.

While NXP Semiconductors 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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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.