Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at Seagate Technology (NASDAQ:STX), it does have a high ROCE right now, but lets see how returns are trending.
Understanding 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 Seagate Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = US$1.3b ÷ (US$8.9b - US$2.6b) (Based on the trailing twelve months to October 2020).
So, Seagate Technology has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Tech industry average of 6.5%.
Above you can see how the current ROCE for Seagate Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Seagate Technology here for free.
What Does the ROCE Trend For Seagate Technology Tell Us?
Things have been pretty stable at Seagate Technology, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So while the current operations are delivering respectable returns, unless capital employed increases we'd be hard-pressed to believe it's a multi-bagger going forward. This probably explains why Seagate Technology is paying out 47% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
The Bottom Line On Seagate Technology's ROCE
In summary, Seagate Technology isn't compounding its earnings but is generating decent returns on the same amount of capital employed. Yet to long term shareholders the stock has gifted them an incredible 177% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
On a separate note, we've found 3 warning signs for Seagate Technology you'll probably want to know about.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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