If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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, the ROCE of Applied Materials (NASDAQ:AMAT) looks great, so lets see what the trend can tell us.
What is 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)
0.42 = US$7.9b ÷ (US$25b - US$6.7b) (Based on the trailing twelve months to May 2022).
Therefore, Applied Materials has an ROCE of 42%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 14%.
View our latest analysis for Applied Materials
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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
The trends we've noticed at Applied Materials are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 42%. The amount of capital employed has increased too, by 33%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line
All in all, it's terrific to see that Applied Materials is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 111% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing to note, we've identified 1 warning sign with Applied Materials and understanding it should be part of your investment process.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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.