If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Applied Materials:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.37 = US$7.3b ÷ (US$26b - US$6.3b) (Based on the trailing twelve months to October 2021).
So, Applied Materials has an ROCE of 37%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.
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, you can check out the forecasts from the analysts covering Applied Materials here for free.
So How Is Applied Materials' ROCE Trending?
Applied Materials is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 37%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 78%. So we're very much inspired by what we're seeing at Applied Materials thanks to its ability to profitably reinvest capital.
Our Take On Applied Materials' ROCE
All in all, it's terrific to see that Applied Materials is reaping the rewards from prior investments and is growing its capital base. And a remarkable 426% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
Applied Materials does have some risks though, and we've spotted 1 warning sign for Applied Materials that you might be interested in.
Applied Materials 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.