What are the early trends to look for to identify a stock that could multiply in value over the long term? Among other things, we will want to see two things; first, growth come back on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. With this in mind, we have noticed some promising trends in super microcomputer (NASDAQ:SMCI) so let’s look a little deeper.
Return on capital employed (ROCE): what is it?
For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. Analysts use this formula to calculate it for Super Micro Computer:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.19 = $335 million ÷ ($3.2 billion – $1.5 billion) (Based on the last twelve months to June 2022).
So, Super Micro Computer has a ROCE of 19%. In absolute terms, that’s a decent return, but compared to the tech industry average of 11%, it’s much better.
Above, you can see how Super Micro Computer’s current ROCE compares to its past returns on capital, but you can’t say anything about the past. If you want, you can check out analyst forecasts covering Super Micro Computer here for free.
What is the return trend?
Super Micro Computer shows positive trends. Figures show that over the past five years, returns generated on capital employed have increased significantly to 19%. The company is actually making more money per dollar of capital used, and it’s worth noting that the amount of capital has also increased by 106%. So we’re very inspired by what we’re seeing at Super Micro Computer with its ability to reinvest capital profitably.
On a separate but related note, it’s important to know that Super Micro Computer has a current liabilities to total assets ratio of 46%, which we would consider quite high. This effectively means that suppliers (or short-term creditors) finance a large part of the business, so just be aware that this may introduce some elements of risk. Although this is not necessarily a bad thing, it can be beneficial if this ratio is lower.
In summary, it’s great to see that Super Micro Computer can increase returns by constantly reinvesting capital at increasing rates of return, as these are some of the key ingredients in these highly sought after multi-baggers. Given that the stock has returned 142% to shareholders over the past five years, it seems investors recognize these changes. So given that the stock has proven to have some promising trends, it’s worth researching the company further to see if those trends are likely to persist.
Since virtually every business faces risks, it’s worth knowing about them, and we’ve spotted 2 warning signs for Super Micro Computer (of which 1 is significant!) that you should know.
For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.
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