Returns On Capital At Check Point Software Technologies (NASDAQ:CHKP) Have Hit The Brakes

By
Simply Wall St
Published
October 25, 2021
NasdaqGS:CHKP
Source: Shutterstock

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, while the ROCE is currently high for Check Point Software Technologies (NASDAQ:CHKP), we aren't jumping out of our chairs because returns are decreasing.

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. To calculate this metric for Check Point Software Technologies, this is the formula:

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

0.22 = US$920m ÷ (US$5.7b - US$1.5b) (Based on the trailing twelve months to June 2021).

Thus, Check Point Software Technologies has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Software industry average of 10%.

See our latest analysis for Check Point Software Technologies

roce
NasdaqGS:CHKP Return on Capital Employed October 26th 2021

In the above chart we have measured Check Point Software Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Check Point Software Technologies Tell Us?

Things have been pretty stable at Check Point Software Technologies, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So it may not be a multi-bagger in the making, but given the decent 22% return on capital, it'd be difficult to find fault with the business's current operations.

The Bottom Line On Check Point Software Technologies' ROCE

Although is allocating it's capital efficiently to generate impressive returns, it isn't compounding its base of capital, which is what we'd see from a multi-bagger. Since the stock has gained an impressive 45% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you're still interested in Check Point Software Technologies it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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