Rambus (NASDAQ:RMBS) Is Doing The Right Things To Multiply Its Share Price

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. With that in mind, we've noticed some promising trends at Rambus (NASDAQ:RMBS) so let's look a bit deeper.

Understanding 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 Rambus is:

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

0.093 = US$81m ÷ (US$963m - US$96m) (Based on the trailing twelve months to March 2023).

So, Rambus has an ROCE of 9.3%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 13%.

View our latest analysis for Rambus

In the above chart we have measured Rambus' 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 Rambus.

SWOT Analysis for Rambus

What Does the ROCE Trend For Rambus Tell Us?

Rambus has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 179,920%. The company is now earning US$0.09 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 38% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Bottom Line

In summary, it's great to see that Rambus has been able to turn things around and earn higher returns on lower amounts of capital. And a remarkable 374% 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.

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

While Rambus isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.