Shareholders Are Optimistic That Arista Networks (NYSE:ANET) Will Multiply In Value

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Arista Networks' (NYSE:ANET) ROCE trend, we were very happy with 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 Arista Networks is:

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

0.27 = US$2.8b ÷ (US$13b - US$2.4b) (Based on the trailing twelve months to September 2024).

So, Arista Networks has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 9.1% earned by companies in a similar industry.

See our latest analysis for Arista Networks

In the above chart we have measured Arista Networks' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Arista Networks for free.

So How Is Arista Networks' ROCE Trending?

Arista Networks deserves to be commended in regards to it's returns. The company has employed 239% more capital in the last five years, and the returns on that capital have remained stable at 27%. Now considering ROCE is an attractive 27%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Our Take On Arista Networks' ROCE

In short, we'd argue Arista Networks has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has done incredibly well with a 723% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

While Arista Networks looks impressive, no company is worth an infinite price. The intrinsic value infographic for ANET helps visualize whether it is currently trading for a fair price.

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.