NASDAQ:AMAT) look very promising so lets take a look.” data-reactid=”28″ type=”text”>If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. And in light of that, the trends we’re seeing at Applied Materials’ (NASDAQ:AMAT) look very promising so lets take a look.
Understanding Return On Capital Employed (ROCE)
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Applied Materials, this is the formula:
(Based on the trailing twelve months to July 2020).” data-reactid=”36″ type=”text”>0.24 = US$4.0b ÷ (US$21b – US$4.3b) (Based on the trailing twelve months to July 2020).
here for free.” data-reactid=”51″ type=”text”>Above you can see how the current ROCE for Applied Materials compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Applied Materials here for free.
What Can We Tell From Applied Materials’ ROCE Trend?
Applied Materials is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 24%. The amount of capital employed has increased too, by 66%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
In summary, it’s great to see that Applied Materials 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. And a remarkable 330% 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 Applied Materials can keep these trends up, it could have a bright future ahead.
2 warning signs for Applied Materials that we think you should be aware of.” data-reactid=”56″ type=”text”>On a final note, we’ve found 2 warning signs for Applied Materials that we think you should be aware of.
list of stocks with solid balance sheets that are also earning high returns on equity.” data-reactid=”57″ type=”text”>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.
This article by Simply Wall St is general in nature. 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.