What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Applied Materials' (NASDAQ:AMAT) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Applied Materials, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.40 = US$7.8b ÷ (US$27b - US$7.4b) (Based on the trailing twelve months to October 2022).
Therefore, Applied Materials has an ROCE of 40%. 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 Applied Materials
NasdaqGS:AMAT Return on Capital Employed February 6th 2023
Above you can see how the current ROCE for Applied Materials compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Applied Materials.
What Can We Tell From Applied Materials' ROCE Trend?
Investors would be pleased with what's happening at Applied Materials. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 40%. The amount of capital employed has increased too, by 26%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line
In summary, it's great to see that Applied Materials can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 158% 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 Applied Materials can keep these trends up, it could have a bright future ahead.
While Applied Materials looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether AMAT is currently trading for a fair price.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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