If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at GlobalFoundries (NASDAQ:GFS) 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 GlobalFoundries is:

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

0.054 = US$826m ÷ (US$18b - US$2.7b) (Based on the trailing twelve months to September 2024).

So, GlobalFoundries has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 8.6%.

View our latest analysis for GlobalFoundries

In the above chart we have measured GlobalFoundries' 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 GlobalFoundries for free.

What Does the ROCE Trend For GlobalFoundries Tell Us?

The fact that GlobalFoundries is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 5.4% on its capital. In addition to that, GlobalFoundries is employing 42% more capital than previously which is expected of a company that's 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 GlobalFoundries' ROCE

Overall, GlobalFoundries gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And since the stock has fallen 35% over the last three years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing to note, we've identified 1 warning sign with GlobalFoundries and understanding it should be part of your investment process.