What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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 GoDaddy (NYSE:GDDY) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for GoDaddy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$515m ÷ (US$7.0b - US$2.5b) (Based on the trailing twelve months to December 2022).
So, GoDaddy has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 12% generated by the IT industry.
See our latest analysis for GoDaddy
In the above chart we have measured GoDaddy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for GoDaddy.
SWOT Analysis for GoDaddy
- Earnings growth over the past year exceeded the industry.
- Debt is well covered by earnings and cashflows.
- No major weaknesses identified for GDDY.
- Annual earnings are forecast to grow faster than the American market.
- Good value based on P/E ratio and estimated fair value.
- Total liabilities exceed total assets, which raises the risk of financial distress.
- Revenue is forecast to grow slower than 20% per year.
So How Is GoDaddy's ROCE Trending?
GoDaddy has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 424% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Key Takeaway
To bring it all together, GoDaddy has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 24% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
One more thing: We've identified 3 warning signs with GoDaddy (at least 1 which is a bit concerning) , and understanding these would certainly be useful.
While GoDaddy isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About NYSE:GDDY
GoDaddy
Engages in the design and development of cloud-based products in the United States and internationally.
Undervalued with proven track record.
