Texas Instruments (TXN) has been transitioning to a 300mm (millimeter) wafer and investing in the fast-growing industrial and automotive markets, boosting its earnings and cash flow. With these improvements, the company aims to maximize its returns per share. The best way to assess a company’s management is through efficiency ratios, which show its ability to generate higher returns from lower investments.
Return on investment
A company’s ROI (return on investment) measures the income it earns on total investments. Long-term investors and companies use ROI metrics to compare investment opportunities and identify those that generate the highest returns.
Texas Instruments’ TTM (trailing-12-month) ROI is 30.0%, higher than Maxim Integrated’s (MXIM) and Analog Devices’ (ADI) ROI of 12.5% and 9.2%, respectively. However, ROI depends on a company’s capital structure, and it is incorrect to compare TXN’s, MXIM’s, and ADI’s ROI because they have different debt-to-equity ratios and investment costs. A better measure for assessing TXN and peers is ROE (return on equity).
Return on equity
ROE shows the profit a company can generate from shareholder capital. A company can improve its ROE by repurchasing stock or improving net income.
Texas Instruments’ ROE improved from 34.8% in 2016 to 40.9% in the last 12 months. Its TTM ROE is higher than MXIM’s and ADI’s TTM ROE of 22.6% and 13.5%, respectively. Texas Instruments expanded its stock buyback program in September, which could boost its ROE.
Interpreting TXN’s efficiency ratios
Texas Instruments’ efficiency ratios make it an attractive investment for long-term investors. Before investing, long-term investors often look at stocks’ valuation to decide whether growth and returns have been priced in. Next, we’ll review Texas Instruments’ valuation.
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