Returns on Capital Paint A Bright Future For Avid Technology (NASDAQ:AVID)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. With that in mind, the ROCE of Avid Technology (NASDAQ:AVID) looks great, so lets see what the trend can tell us.

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. The formula for this calculation on Avid Technology is:

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

0.46 = US$45m ÷ (US$274m - US$177m) (Based on the trailing twelve months to March 2023).

So, Avid Technology has an ROCE of 46%. That's a fantastic return and not only that, it outpaces the average of 7.2% earned by companies in a similar industry.

Check out our latest analysis for Avid Technology

In the above chart we have measured Avid Technology'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 Avid Technology.

SWOT Analysis for Avid Technology

The Trend Of ROCE

Avid Technology is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 46%. Basically the business is earning more per dollar of capital invested and in addition to that, 67% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 65%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Avid Technology has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

Our Take On Avid Technology's ROCE

All in all, it's terrific to see that Avid Technology is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 386% 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 more about Avid Technology, we've spotted 2 warning signs, and 1 of them is significant.

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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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.