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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Autodesk (NASDAQ:ADSK) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Autodesk:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$539m ÷ (US$5.7b - US$2.6b) (Based on the trailing twelve months to July 2020).
Thus, Autodesk has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 8.9% it's much better.
In the above chart we have measured Autodesk's 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 report for Autodesk.
How Are Returns Trending?
You'd find it hard not to be impressed with the ROCE trend at Autodesk. We found that the returns on capital employed over the last five years have risen by 1,192%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Autodesk appears to been achieving more with less, since the business is using 22% less capital to run its operation. Autodesk may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 46% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
From what we've seen above, Autodesk has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a staggering 347% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
Like most companies, Autodesk does come with some risks, and we've found 2 warning signs 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.
This article by Simply Wall St is general in nature. 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.
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