Yahoo Finance We Like These Underlying Return On Capital Trends At GLOBALFOUNDRIES (NASDAQ:GFS)
There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at GLOBALFOUNDRIES (NASDAQ:GFS) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for GLOBALFOUNDRIES, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.087 = US$1.3b ÷ (US$18b - US$3.4b) (Based on the trailing twelve months to December 2022).
Thus, GLOBALFOUNDRIES has an ROCE of 8.7%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 14%.
See our latest analysis for GLOBALFOUNDRIES
Above you can see how the current ROCE for GLOBALFOUNDRIES 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 GLOBALFOUNDRIES.
So How Is GLOBALFOUNDRIES' ROCE Trending?
We're delighted to see that GLOBALFOUNDRIES is reaping rewards from its investments and has now broken into profitability. The company was generating losses three years ago, but has managed to turn it around and as we saw earlier is now earning 8.7%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Bottom Line
In summary, we're delighted to see that GLOBALFOUNDRIES has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 16% return over the last year. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
GLOBALFOUNDRIES does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...
While GLOBALFOUNDRIES 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.
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