Cirrus Logic (NASDAQ:CRUS) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, while the ROCE is currently high for Cirrus Logic (NASDAQ:CRUS), we aren't jumping out of our chairs because returns are decreasing.

What Is 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. Analysts use this formula to calculate it for Cirrus Logic:

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

0.22 = US$402m ÷ (US$2.1b - US$253m) (Based on the trailing twelve months to June 2022).

Thus, Cirrus Logic has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 15%.

Our analysis indicates that CRUS is potentially undervalued!

Above you can see how the current ROCE for Cirrus Logic compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Cirrus Logic here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Cirrus Logic doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 29%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Cirrus Logic's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Cirrus Logic. These trends are starting to be recognized by investors since the stock has delivered a 22% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing, we've spotted 1 warning sign facing Cirrus Logic that you might find interesting.

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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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.