Returns On Capital Are Showing Encouraging Signs At GLOBALFOUNDRIES (NASDAQ:GFS)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. With that in mind, we've noticed some promising trends at GLOBALFOUNDRIES (NASDAQ:GFS) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on GLOBALFOUNDRIES is:

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

0.072 = US$965m ÷ (US$17b - US$3.9b) (Based on the trailing twelve months to September 2022).

Therefore, GLOBALFOUNDRIES has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 15%.

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'd like, you can check out the forecasts from the analysts covering GLOBALFOUNDRIES here for free.

How Are Returns 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 two years ago but is is now generating 7.2% 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.

In Conclusion...

Long story short, we're delighted to see that GLOBALFOUNDRIES' reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 11% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we've found 1 warning sign for GLOBALFOUNDRIES that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.