If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Looking at Apple (NASDAQ:AAPL), it does have a high ROCE right now, but lets see how returns are trending.
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. The formula for this calculation on Apple is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.30 = US$67b ÷ (US$317b – US$95b) (Based on the trailing twelve months to June 2020).
Thus, Apple has an ROCE of 30%. That’s a fantastic return and not only that, it outpaces the average of 7.2% earned by companies in a similar industry.
In the above chart we have measured Apple’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 Apple here for free.
So How Is Apple’s ROCE Trending?
There hasn’t been much to report for Apple’s returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they’re past the growth phase. Although current returns are high, we’d need more evidence of underlying growth for it to look like a multi-bagger going forward.
The Bottom Line On Apple’s ROCE
In summary, Apple isn’t compounding its earnings but is generating decent returns on the same amount of capital employed. Yet to long term shareholders the stock has gifted them an incredible 427% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn’t get our hopes up too high.
If you want to continue researching Apple, you might be interested to know about the 2 warning signs that our analysis has discovered.
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. 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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