Synopsys (NASDAQ:SNPS) Is Experiencing Growth In Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. So on that note, Synopsys (NASDAQ:SNPS) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Synopsys:

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

0.17 = US$1.2b ÷ (US$9.3b - US$2.5b) (Based on the trailing twelve months to July 2022).

So, Synopsys has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 10% generated by the Software industry.

View our latest analysis for Synopsys

Above you can see how the current ROCE for Synopsys 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 Synopsys here for free.

What Can We Tell From Synopsys' ROCE Trend?

Investors would be pleased with what's happening at Synopsys. The data shows that returns on capital have increased substantially over the last five years to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 73% more capital is being employed now too. So we're very much inspired by what we're seeing at Synopsys thanks to its ability to profitably reinvest capital.

What We Can Learn From Synopsys' ROCE

In summary, it's great to see that Synopsys 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 245% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Synopsys, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Synopsys may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.