Why The 46% Return On Capital At NVIDIA (NASDAQ:NVDA) Should Have Your Attention

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at NVIDIA's (NASDAQ:NVDA) look very promising so lets take a look.

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 NVIDIA, this is the formula:

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

0.46 = US$21b ÷ (US$54b - US$9.1b) (Based on the trailing twelve months to October 2023).

Thus, NVIDIA has an ROCE of 46%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 11%.

See our latest analysis for NVIDIA

In the above chart we have measured NVIDIA's 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 NVIDIA here for free.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at NVIDIA. The data shows that returns on capital have increased substantially over the last five years to 46%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 274%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From NVIDIA's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what NVIDIA has. And a remarkable 1,375% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching NVIDIA, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.