Here's What Applied Materials' (NASDAQ:AMAT) Strong Returns On Capital Mean

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Applied Materials (NASDAQ:AMAT) looks attractive right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Applied Materials, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.33 = US$7.7b ÷ (US$31b - US$7.4b) (Based on the trailing twelve months to October 2023).

Thus, Applied Materials has an ROCE of 33%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

View our latest analysis for Applied Materials

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

In terms of Applied Materials' history of ROCE, it's quite impressive. The company has consistently earned 33% for the last five years, and the capital employed within the business has risen 70% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Applied Materials can keep this up, we'd be very optimistic about its future.

The Bottom Line On Applied Materials' ROCE

In short, we'd argue Applied Materials has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has done incredibly well with a 374% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Applied Materials does have some risks though, and we've spotted 1 warning sign for Applied Materials that you might be interested in.

Applied Materials is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.