If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Microsoft (NASDAQ:MSFT) we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Microsoft, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.31 = US$82b ÷ (US$345b – US$77b) (Based on the trailing twelve months to March 2022).
So, Microsoft has an ROCE of 31%. That’s a fantastic return and not only that, it outpaces the average of 9.4% 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.
What Can We Tell From Microsoft’s ROCE Trend?
The trends we’ve noticed at Microsoft 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 54%. So we’re very much inspired by what we’re seeing at Microsoft thanks to its ability to profitably reinvest capital.
The Key Takeaway
To sum it up, Microsoft has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 307% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.
Before jumping to any conclusions though, we need to know what value we’re getting for the current share price. That’s where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.
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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