What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Adobe's (NASDAQ:ADBE) look very promising so lets take a look.
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 Adobe is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.36 = US$7.0b ÷ (US$29b - US$9.5b) (Based on the trailing twelve months to March 2024).
Therefore, Adobe has an ROCE of 36%. That's a fantastic return and not only that, it outpaces the average of 7.2% earned by companies in a similar industry.
See our latest analysis for Adobe
Above you can see how the current ROCE for Adobe 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 Adobe for free.
So How Is Adobe's ROCE Trending?
Adobe is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 36%. 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 35%. So we're very much inspired by what we're seeing at Adobe thanks to its ability to profitably reinvest capital.
What We Can Learn From Adobe'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 Adobe has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 76% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
While Adobe looks impressive, no company is worth an infinite price. The intrinsic value infographic for ADBE helps visualize whether it is currently trading for a fair price.
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.
About NasdaqGS:ADBE
Flawless balance sheet and good value.
