Under The Bonnet, Cadence Design Systems' (NASDAQ:CDNS) Returns Look Impressive

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Cadence Design Systems is:

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

0.31 = US$1.3b ÷ (US$5.7b - US$1.6b) (Based on the trailing twelve months to December 2023).

So, Cadence Design Systems has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Software industry average of 7.3%.

See our latest analysis for Cadence Design Systems

Above you can see how the current ROCE for Cadence Design Systems 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 Cadence Design Systems for free.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Cadence Design Systems are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 31%. 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 131%. So we're very much inspired by what we're seeing at Cadence Design Systems thanks to its ability to profitably reinvest capital.

The Bottom Line On Cadence Design Systems' ROCE

All in all, it's terrific to see that Cadence Design Systems is reaping the rewards from prior investments and is growing its capital base. And a remarkable 398% 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 the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for CDNS on our platform that is definitely worth checking out.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.