If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. A common approach is to try to find a company Return return on capital employed (ROCE) which is increasing along with the growth amount of capital employed. Basically this means that a company has profitable initiatives in which it can continue to reinvest, which is characteristic of a compounding machine. So when we looked at the ROCE trend Microsoft (NASDAQ:MSFT) We really like what we see.Thank you for reading this post, don't forget to subscribe!
Understanding Return on Capital Employed (ROCE)
If you haven’t dealt with ROCE before, it measures the ‘return’ (pre-tax profit) generated by a company on the capital it employs in its business. The formula for this calculation at Microsoft is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.29 = US$89B ÷ (US$412B – US$104B) (Based on last twelve months till June 2023),
so, Microsoft’s ROCE is 29%. This is a fantastic return and what’s more, it’s also higher than the average 8.9% earned by companies in the same industry.
See our latest analysis for Microsoft
In the chart above we measured Microsoft’s past ROCE against its past performance, but the future is arguably more important. If you want to see what analysts are forecasting next, you should check out our Free Report for Microsoft.
So how is Microsoft’s ROCE trending?
The trends we have seen at Microsoft are quite reassuring. The data shows that returns on capital have increased substantially to 29% in the last five years. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has also increased by 54%. Increasing returns on increasing amounts of capital are common among multi-baggers and that’s why we’re impressed.
A company that is growing its returns on capital and can continually reinvest in itself is a highly sought-after characteristic, and Microsoft has just that. Since the stock has delivered a staggering 224% return to shareholders over the last five years, it seems investors are recognizing these changes. So given that the stock has proven that it has promising trends, it is worth doing further research on the company to see if these trends are likely to continue.
On a final note, we have found 1 warning sign for Microsoft We think you should know about it.
If you want to see other companies earning high returns, check out our Free Here is a list of companies earning high returns with solid balance sheets.
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This article from Simply Wall St is of a general nature. We only provide commentary based on historical data and analyst forecasts using unbiased methodology and our articles are not intended to provide financial advice. It does not recommend buying or selling any stock, and does not take into account your objectives, or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.