If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. 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 Facebook's (NASDAQ:FB) 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. To calculate this metric for Facebook, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = US$38b ÷ (US$164b - US$13b) (Based on the trailing twelve months to March 2021).
Thus, Facebook has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.
Above you can see how the current ROCE for Facebook 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 report for Facebook.
How Are Returns Trending?
Facebook is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 25%. The amount of capital employed has increased too, by 200%. So we're very much inspired by what we're seeing at Facebook thanks to its ability to profitably reinvest capital.
Our Take On Facebook's ROCE
In summary, it's great to see that Facebook 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. Since the stock has returned a staggering 199% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.
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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