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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Ribbon Communications (NASDAQ:RBBN) looks quite promising in regards to its trends of return on capital.
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What Is 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. To calculate this metric for Ribbon Communications, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = US$27m ÷ (US$1.2b - US$329m) (Based on the trailing twelve months to December 2024).
Thus, Ribbon Communications has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Communications industry average of 9.0%.
Check out our latest analysis for Ribbon Communications
Above you can see how the current ROCE for Ribbon Communications compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Ribbon Communications .
What Does the ROCE Trend For Ribbon Communications Tell Us?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 3.2%. Basically the business is earning more per dollar of capital invested and in addition to that, 37% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line On Ribbon Communications' ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Ribbon Communications has. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 18% to shareholders. So with that in mind, we think the stock deserves further research.