Returns Are Gaining Momentum At Avnet (NASDAQ:AVT)
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Avnet (NASDAQ:AVT) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 Avnet:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$1.1b ÷ (US$13b - US$4.8b) (Based on the trailing twelve months to December 2023).
Thus, Avnet has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 11% generated by the Electronic industry.
Check out our latest analysis for Avnet
Above you can see how the current ROCE for Avnet compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Avnet .
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from Avnet. The data shows that returns on capital have increased substantially over the last five years to 13%. The amount of capital employed has increased too, by 22%. So we're very much inspired by what we're seeing at Avnet thanks to its ability to profitably reinvest capital.
What We Can Learn From Avnet's ROCE
To sum it up, Avnet has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 20% to shareholders. So with that in mind, we think the stock deserves further research.
If you want to know some of the risks facing Avnet we've found 3 warning signs (2 are potentially serious!) that you should be aware of before investing here.
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.
