GLOBALFOUNDRIES (NASDAQ:GFS) Might Have The Makings Of A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at GLOBALFOUNDRIES (NASDAQ:GFS) and its trend of ROCE, we really liked what we saw.

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

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 GLOBALFOUNDRIES, this is the formula:

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

0.08 = US$1.2b ÷ (US$18b - US$3.1b) (Based on the trailing twelve months to December 2023).

So, GLOBALFOUNDRIES has an ROCE of 8.0%. In absolute terms, that's a low return but it's around the Semiconductor industry average of 9.7%.

See our latest analysis for GLOBALFOUNDRIES

In the above chart we have measured GLOBALFOUNDRIES' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for GLOBALFOUNDRIES .

So How Is GLOBALFOUNDRIES' ROCE Trending?

We're delighted to see that GLOBALFOUNDRIES is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 8.0% on its capital. Not only that, but the company is utilizing 23% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Key Takeaway

In summary, it's great to see that GLOBALFOUNDRIES has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 26% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for GFS on our platform that is definitely worth checking out.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.