If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in QUALCOMM’s (NASDAQ:QCOM) returns on capital, so let’s have a look.
Return On Capital Employed (ROCE): What is it?
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on QUALCOMM is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.42 = US$13b ÷ (US$44b – US$13b) (Based on the trailing twelve months to March 2022).
So, QUALCOMM 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%.
Above you can see how the current ROCE for QUALCOMM 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 QUALCOMM here for free.
What Does the ROCE Trend For QUALCOMM Tell Us?
QUALCOMM has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 195% over the trailing five years. That’s a very favorable trend because this means that the company is earning more per dollar of capital that’s being employed. Interestingly, the business may be becoming more efficient because it’s applying 33% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it’s shrinking in terms of total assets.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 30% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It’s worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
The Bottom Line
In the end, QUALCOMM has proven it’s capital allocation skills are good with those higher returns from less amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.
QUALCOMM does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can’t be ignored…
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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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.