What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount 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. So when we looked at the ROCE trend of Microsoft (NASDAQ:MSFT) we really liked what we saw.
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. Analysts use this formula to calculate it for Microsoft:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.28 = US$113b ÷ (US$523b – US$115b) (Based on the trailing twelve months to September 2024).
Therefore, Microsoft has an ROCE of 28%. That’s a fantastic return and not only that, it outpaces the average of 8.9% earned by companies in a similar industry.
See our latest analysis for Microsoft
Above you can see how the current ROCE for Microsoft compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free analyst report for Microsoft .
Microsoft is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 28%. 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 85%. So we’re very much inspired by what we’re seeing at Microsoft thanks to its ability to profitably reinvest capital.
All in all, it’s terrific to see that Microsoft is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 191% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it’s worth looking further into this stock because if Microsoft can keep these trends up, it could have a bright future ahead.
On a separate note, we’ve found 1 warning sign for Microsoft you’ll probably want to know about.
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.
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