Stock Analysis

Investors Should Be Encouraged By Cisco Systems' (NASDAQ:CSCO) Returns On Capital

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NasdaqGS:CSCO
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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 Cisco Systems (NASDAQ:CSCO) 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. To calculate this metric for Cisco Systems, this is the formula:

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

0.21 = US$14b ÷ (US$94b - US$26b) (Based on the trailing twelve months to July 2022).

So, Cisco Systems has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 8.7% earned by companies in a similar industry.

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NasdaqGS:CSCO Return on Capital Employed September 29th 2022

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

What Does the ROCE Trend For Cisco Systems Tell Us?

We're pretty happy with how the ROCE has been trending at Cisco Systems. We found that the returns on capital employed over the last five years have risen by 65%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 33% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Key Takeaway

In the end, Cisco Systems has proven it's capital allocation skills are good with those higher returns from less amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 43% return over the last five years. 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.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

Cisco Systems is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

What are the risks and opportunities for Cisco Systems?

Cisco Systems, Inc. designs, manufactures, and sells Internet Protocol based networking and other products related to the communications and information technology industry in the Americas, Europe, the Middle East, Africa, the Asia Pacific, Japan, and China.

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Rewards

  • Trading at 31.8% below our estimate of its fair value

  • Earnings are forecast to grow 7.25% per year

  • Earnings have grown 19.9% per year over the past 5 years

Risks

No risks detected for CSCO from our risks checks.

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About NasdaqGS:CSCO

Cisco Systems

Cisco Systems, Inc. designs, manufactures, and sells Internet Protocol based networking and other products related to the communications and information technology industry in the Americas, Europe, the Middle East, Africa, the Asia Pacific, Japan, and China.

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Dividends5

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Flawless balance sheet, undervalued and pays a dividend.