Texas Instruments' ROCE Slide: A Threat to Its Compounding Machine Status?

The semiconductor industry has long been a realm of feast-and-famine cycles, but Texas Instruments (NASDAQ:TXN) has historically stood out for its ability to deliver steady returns. Its analog chip dominance and disciplined capital allocation once made it a poster child for long-term investors. Yet today, a critical metric is flashing warning signs: its Return on Capital Employed (ROCE) has nearly halved over the past five years, raising questions about whether its growth engine is sputtering.

The ROCE Dilemma: From 37% to 18%

ROCE, a measure of how effectively a company generates profits from the capital it deploys, has been a cornerstone of Texas Instruments' success. In the five years ending 2020, ROCE averaged 37%, a testament to its efficient use of capital. By March 2025, however, that figure had plummeted to 18%—still above the semiconductor industry average of 8.9% but a stark decline (see TXN's ROCE from 2015 to 2025 vs. Semiconductor Industry Average).

Analysts point to two key factors driving this erosion: overcapitalization without sales leverage and strategic bets with delayed payoffs. Texas Instruments has invested heavily in expanding its 300-millimeter wafer fabrication capacity and developing advanced chips like gallium nitride (GaN) semiconductors. Yet these initiatives, while critical for future competitiveness, have yet to translate into meaningful sales growth.

TXN's capital expenditures vs. revenue growth since 2020

The Capital Allocation Crossroads

Texas Instruments' capital allocation strategy has always been conservative, favoring organic growth over acquisitions. But critics argue that its recent investments are outpacing returns. In the trailing twelve months ending March 2025, capital employed surged to $31.5 billion (calculated as total assets minus current liabilities), while EBIT grew only modestly to $5.5 billion. This imbalance has led to a ROCE gap: capital deployed is rising faster than profits, diluting returns.

Analysts at Mizuho and UBS have downgraded the stock, citing concerns that the company's focus on long-term manufacturing capacity—such as tripling GaN production—may not offset near-term margin pressures. “Texas Instruments is reinvesting for the future, but investors want to see the payoffs materialize,” said one semiconductor analyst.

The Elephant in the Room: Valuation and Investor Sentiment

Despite these headwinds, Texas Instruments' stock has risen 58% over the past five years, outperforming the S&P 500. This disconnect between rising stock prices and declining ROCE suggests investors are betting on a turnaround. Yet there are cracks in this optimism:

• Analyst consensus: Of 19 analysts covering TXN, 14 have “Hold” or “Sell” ratings, with average price targets falling 11.8% year-to-date.
• Debt concerns: Its debt-to-equity ratio of 0.78, while manageable, has risen steadily, raising questions about financial flexibility.
• Margin sustainability: Net margins, once a reliable 30%, dipped to 28.98% in 2024—a small but concerning shift in a low-margin industry.

Can Texas Instruments Rebound?

The company argues its investments are strategic: analog chips for electric vehicles, data centers, and industrial automation are high-margin markets with long lifecycles. CEO Richard Templeton has emphasized that the “long lead times” of semiconductor projects mean payoffs are years away.

Investors, however, are growing impatient. The stock's 25% decline in 2024—triggered by a 10.7% YoY revenue drop in Q4—highlighted how sensitive the market is to execution missteps.

The Bottom Line for Investors

Texas Instruments faces a critical choice: slow capital spending to protect ROCE, risking long-term competitiveness, or press ahead with investments, accepting lower near-term returns.

For investors, the risks are clear:
- Valuation risk: The stock trades at 24x forward earnings—expensive for a company with slowing growth.
- ROCE rebound dependency: If capital investments don't lift sales by 2026–2027, the valuation could crumble.

TXN's stock price performance vs. ROCE since 2020

Investment advice: Texas Instruments remains a leader in analog chips, and its balance sheet is strong. However, investors should demand concrete signs of ROCE recovery—such as sales growth outpacing capital spending—before committing new capital. For now, the stock's valuation assumes a best-case scenario; downside risks loom large if execution falters.

In the semiconductor world, patience is a virtue—but so is profit. Texas Instruments' next few quarters will determine whether its ROCE slide is a temporary stumble or a sign of deeper structural issues.