Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. With that in mind, the ROCE of Facebook (NASDAQ:FB) looks great, so lets see what the trend can tell us.
Return On Capital Employed (ROCE): What is it?
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 Facebook, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = US$33b ÷ (US$159b - US$15b) (Based on the trailing twelve months to December 2020).
Thus, Facebook has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 9.4% 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Facebook's ROCE Trend?
We like the trends that we're seeing from Facebook. The data shows that returns on capital have increased substantially over the last five years to 23%. The amount of capital employed has increased too, by 204%. 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.
All in all, it's terrific to see that Facebook is reaping the rewards from prior investments and is growing its capital base. And a remarkable 150% 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 Facebook and understanding this should be part of your investment process.
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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