Returns At Seagate Technology Holdings (NASDAQ:STX) Appear To Be Weighed Down

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So while Seagate Technology Holdings (NASDAQ:STX) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Seagate Technology Holdings:

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

0.20 = US$959m ÷ (US$8.0b - US$3.2b) (Based on the trailing twelve months to September 2024).

Therefore, Seagate Technology Holdings has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 8.7% earned by companies in a similar industry.

Check out our latest analysis for Seagate Technology Holdings

Above you can see how the current ROCE for Seagate Technology Holdings 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 Seagate Technology Holdings for free.

How Are Returns Trending?

Over the past five years, Seagate Technology Holdings' ROCE has remained relatively flat while the business is using 23% less capital than before. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. But we have to give it to Seagate Technology Holdings because the returns on the capital it is employing are still high in relative terms.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 40% of total assets, this reported ROCE would probably be less than20% because total capital employed would be higher.The 20% ROCE could be even lower if current liabilities weren't 40% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

What We Can Learn From Seagate Technology Holdings' ROCE

Overall, we're not ecstatic to see Seagate Technology Holdings reducing the amount of capital it employs in the business. Yet to long term shareholders the stock has gifted them an incredible 101% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Seagate Technology Holdings does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those are a bit concerning...

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.