The Trend Of High Returns At Cadence Design Systems (NASDAQ:CDNS) Has Us Very Interested

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Cadence Design Systems (NASDAQ:CDNS) we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Cadence Design Systems:

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

0.28 = US$1.1b ÷ (US$5.4b - US$1.3b) (Based on the trailing twelve months to September 2023).

Therefore, Cadence Design Systems has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Software industry average of 8.5%.

View our latest analysis for Cadence Design Systems

In the above chart we have measured Cadence Design Systems' 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 Cadence Design Systems.

How Are Returns Trending?

We like the trends that we're seeing from Cadence Design Systems. The data shows that returns on capital have increased substantially over the last five years to 28%. The amount of capital employed has increased too, by 141%. So we're very much inspired by what we're seeing at Cadence Design Systems thanks to its ability to profitably reinvest capital.

In Conclusion...

In summary, it's great to see that Cadence Design Systems can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 505% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Cadence Design Systems can keep these trends up, it could have a bright future ahead.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

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.

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

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.