If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we’re seeing at Microsoft’s (NASDAQ:MSFT) 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. The formula for this calculation on Microsoft is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.31 = US$85b ÷ (US$360b – US$87b) (Based on the trailing twelve months to September 2022).
So, Microsoft has an ROCE of 31%. That’s a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.
View our latest analysis for Microsoft
In the above chart we have measured Microsoft’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering Microsoft here for free.
The Trend Of ROCE
Microsoft is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 31%. The amount of capital employed has increased too, by 38%. 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.
Our Take On Microsoft’s ROCE
All in all, it’s terrific to see that Microsoft is reaping the rewards from prior investments and is growing its capital base. And a remarkable 196% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.
One more thing to note, we’ve identified 1 warning sign with Microsoft and understanding this should be part of your investment process.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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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