In This Article:
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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, when we ran our eye over Cadence Design Systems' (NASDAQ:CDNS) trend of ROCE, we 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. To calculate this metric for Cadence Design Systems, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$1.4b ÷ (US$9.0b - US$1.4b) (Based on the trailing twelve months to December 2024).
So, Cadence Design Systems has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Software industry.
View our latest analysis for Cadence Design Systems
In the above chart we have measured Cadence Design Systems' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Cadence Design Systems .
What Can We Tell From Cadence Design Systems' ROCE Trend?
While the current returns on capital are decent, they haven't changed much. The company has consistently earned 18% for the last five years, and the capital employed within the business has risen 183% in that time. Since 18% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Bottom Line
In the end, Cadence Design Systems has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 226% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
Cadence Design Systems could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for CDNS on our platform quite valuable.