Radware (NASDAQ:RDWR) Might Have The Makings Of A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Radware (NASDAQ:RDWR) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Radware is:

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

0.044 = US$20m ÷ (US$618m - US$152m) (Based on the trailing twelve months to March 2022).

So, Radware has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 9.0%.

View our latest analysis for Radware

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

What Does the ROCE Trend For Radware Tell Us?

Radware has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 4.4% which is a sight for sore eyes. Not only that, but the company is utilizing 35% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Our Take On Radware's ROCE

Overall, Radware gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 17% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Like most companies, Radware does come with some risks, and we've found 1 warning sign that you should be aware of.

While Radware 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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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.