Returns On Capital Are A Standout For Microsoft (NASDAQ:MSFT)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Microsoft's (NASDAQ:MSFT) returns on capital, so let's have a look.

What Is 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 Microsoft is:

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

0.31 = US$83b ÷ (US$365b - US$95b) (Based on the trailing twelve months to June 2022).

Therefore, Microsoft has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Software industry average of 10%.

Check out our latest analysis for Microsoft

In the above chart we have measured Microsoft's 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.

How Are Returns Trending?

Microsoft is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 31%. The amount of capital employed has increased too, by 39%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On Microsoft's ROCE

To sum it up, Microsoft has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 324% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

While Microsoft looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether MSFT is currently trading for a fair price.

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.