Stock Analysis
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- NasdaqGS:META
Meta Platforms (NASDAQ:META) Knows How To Allocate Capital
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Meta Platforms (NASDAQ:META) looks attractive right now, so lets see what the trend of returns can tell us.
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 Meta Platforms is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$34b ÷ (US$186b - US$27b) (Based on the trailing twelve months to December 2022).
Thus, Meta Platforms has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Interactive Media and Services industry average of 7.0%.
Check out our latest analysis for Meta Platforms
In the above chart we have measured Meta Platforms' 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 Meta Platforms here for free.
What Can We Tell From Meta Platforms' ROCE Trend?
It's hard not to be impressed by Meta Platforms' returns on capital. The company has employed 96% more capital in the last five years, and the returns on that capital have remained stable at 21%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Meta Platforms can keep this up, we'd be very optimistic about its future.
Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 15% of total assets, this reported ROCE would probably be less than21% because total capital employed would be higher.The 21% ROCE could be even lower if current liabilities weren't 15% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.
The Bottom Line
In summary, we're delighted to see that Meta Platforms has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And given the stock has only risen 35% over the last five years, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.
On a separate note, we've found 2 warning signs for Meta Platforms you'll probably want to know about.
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.
What are the risks and opportunities for Meta Platforms?
Meta Platforms, Inc. engages in the development of products that enable people to connect and share with friends and family through mobile devices, personal computers, virtual reality headsets, and wearables worldwide.
Rewards
Trading at 20% below our estimate of its fair value
Earnings are forecast to grow 14.2% per year
Risks
Significant insider selling over the past 3 months
Profit margins (18.3%) are lower than last year (31.2%)
Further research on
Meta Platforms
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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.
About NasdaqGS:META
Meta Platforms
Meta Platforms, Inc. engages in the development of products that enable people to connect and share with friends and family through mobile devices, personal computers, virtual reality headsets, and wearables worldwide.
Excellent balance sheet and good value.
