Synopsys (NASDAQ:SNPS) Might Have The Makings Of A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So on that note, Synopsys (NASDAQ:SNPS) looks quite promising in regards to its trends of return on capital.

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

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)

0.18 = US$1.4b ÷ (US$11b - US$2.6b) (Based on the trailing twelve months to January 2024).

So, Synopsys has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 7.4% generated by the Software industry.

See our latest analysis for Synopsys

In the above chart we have measured Synopsys' 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 analyst report for Synopsys .

How Are Returns Trending?

Synopsys is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 18%. 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 83%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Synopsys has. Since the stock has returned a staggering 420% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing Synopsys, we've discovered 1 warning sign that you should be aware of.

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.