Investors Will Want GLOBALFOUNDRIES' (NASDAQ:GFS) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, GLOBALFOUNDRIES (NASDAQ:GFS) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for GLOBALFOUNDRIES, this is the formula:

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

0.087 = US$1.3b ÷ (US$18b - US$3.4b) (Based on the trailing twelve months to December 2022).

Thus, GLOBALFOUNDRIES has an ROCE of 8.7%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 14%.

Check out 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'd like to see what analysts are forecasting going forward, you should check out our free report for GLOBALFOUNDRIES.

SWOT Analysis for GLOBALFOUNDRIES

How Are Returns Trending?

GLOBALFOUNDRIES has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses three years ago, but has managed to turn it around and as we saw earlier is now earning 8.7%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Bottom Line

To sum it up, GLOBALFOUNDRIES is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 20% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know more about GLOBALFOUNDRIES, we've spotted 2 warning signs, and 1 of them is significant.

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.