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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at GLOBALFOUNDRIES (NASDAQ:GFS) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for GLOBALFOUNDRIES:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = US$1.2b ÷ (US$18b - US$2.7b) (Based on the trailing twelve months to September 2023).
So, GLOBALFOUNDRIES has an ROCE of 8.3%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 11%.
Check out 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 here for free.
The Trend Of ROCE
The fact that GLOBALFOUNDRIES is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses three years ago, but now it's earning 8.3% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, GLOBALFOUNDRIES is utilizing 39% more capital than it was three years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Bottom Line
To the delight of most shareholders, GLOBALFOUNDRIES has now broken into profitability. Investors may not be impressed by the favorable underlying trends yet because over the last year the stock has only returned 2.4% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Like most companies, GLOBALFOUNDRIES does come with some risks, and we've found 1 warning sign that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.