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

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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 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. Analysts use this formula to calculate it for GLOBALFOUNDRIES:

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

0.089 = US$1.3b ÷ (US$18b - US$2.9b) (Based on the trailing twelve months to March 2023).

Thus, GLOBALFOUNDRIES has an ROCE of 8.9%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 13%.

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

The Trend Of ROCE

We're delighted to see that GLOBALFOUNDRIES is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses three years ago, but now it's earning 8.9% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, GLOBALFOUNDRIES is utilizing 27% more capital than it was three years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

Our Take On GLOBALFOUNDRIES' ROCE

Overall, GLOBALFOUNDRIES gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 28% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if GLOBALFOUNDRIES can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 2 warning signs we've spotted with GLOBALFOUNDRIES (including 1 which is concerning) .

While GLOBALFOUNDRIES may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.