QUALCOMM (NASDAQ:QCOM) Is Investing Its Capital With Increasing Efficiency

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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, the ROCE of QUALCOMM (NASDAQ:QCOM) looks great, so lets see what the trend can tell us.

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 QUALCOMM, this is the formula:

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

0.21 = US$9.0b ÷ (US$53b - US$9.1b) (Based on the trailing twelve months to March 2024).

Thus, QUALCOMM has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 9.7% earned by companies in a similar industry.

See our latest analysis for QUALCOMM

Above you can see how the current ROCE for QUALCOMM compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering QUALCOMM for free.

How Are Returns Trending?

We like the trends that we're seeing from QUALCOMM. Over the last five years, returns on capital employed have risen substantially to 21%. 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 87%. 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.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 17%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Key Takeaway

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 QUALCOMM has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if QUALCOMM can keep these trends up, it could have a bright future ahead.

QUALCOMM does have some risks though, and we've spotted 1 warning sign for QUALCOMM that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.

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