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. 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 NVE's (NASDAQ:NVEC) returns on capital, so let's have a look.

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

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. The formula for this calculation on NVE is:

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

0.27 = US$18m ÷ (US$67m - US$1.7m) (Based on the trailing twelve months to June 2024).

Therefore, NVE has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 9.1%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for NVE's ROCE against it's prior returns. If you'd like to look at how NVE has performed in the past in other metrics, you can view this free graph of NVE's past earnings, revenue and cash flow.

How Are Returns Trending?

NVE has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 44%. The company is now earning US$0.3 per dollar of capital employed. In regards to capital employed, NVE appears to been achieving more with less, since the business is using 21% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Bottom Line On NVE's ROCE

In the end, NVE has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a solid 57% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if NVE can keep these trends up, it could have a bright future ahead.

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

NVE is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.