What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. And in light of that, the trends we’re seeing at Meta Platforms’ (NASDAQ:FB) look very promising so lets take a look.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Meta Platforms, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.31 = US$44b ÷ (US$164b – US$21b) (Based on the trailing twelve months to March 2022).
So, Meta Platforms has an ROCE of 31%. In absolute terms that’s a great return and it’s even better than the Interactive Media and Services industry average of 5.1%.
See our latest analysis for Meta Platforms
In the above chart we have measured Meta Platforms’ prior ROCE against its prior performance, but the future is arguably more important. 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 Meta Platforms are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 31%. The amount of capital employed has increased too, by 117%. 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.
In Conclusion…
In summary, it’s great to see that Meta Platforms can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Considering the stock has delivered 27% to its stockholders over the last five years, it may be fair to think that investors aren’t fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.
One more thing to note, we’ve identified 1 warning sign with Meta Platforms and understanding it should be part of your investment process.
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.
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