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Has Cirrus Logic (NASDAQ:CRUS) Got What It Takes To Become A Multi-Bagger?

Simply Wall St
·3 min read

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Cirrus Logic (NASDAQ:CRUS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Cirrus Logic:

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

0.12 = US$188m ÷ (US$1.7b - US$178m) (Based on the trailing twelve months to September 2020).

So, Cirrus Logic has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 10% it's much better.

See our latest analysis for Cirrus Logic

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In the above chart we have measured Cirrus Logic's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Cirrus Logic's ROCE Trending?

On the surface, the trend of ROCE at Cirrus Logic doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 12%. However it looks like Cirrus Logic might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Cirrus Logic's ROCE

Bringing it all together, while we're somewhat encouraged by Cirrus Logic's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 164% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Like most companies, Cirrus Logic does come with some risks, and we've found 2 warning signs that you should be aware of.

While Cirrus Logic isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.