Shareholders Are Optimistic That Arista Networks (NYSE:ANET) Will Multiply In Value
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Ergo, when we looked at the ROCE trends at Arista Networks (NYSE:ANET), we liked what we saw.
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. To calculate this metric for Arista Networks, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = US$1.5b ÷ (US$6.8b - US$1.3b) (Based on the trailing twelve months to December 2022).
Thus, Arista Networks has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.
See our latest analysis for Arista Networks
Above you can see how the current ROCE for Arista Networks 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 Arista Networks here for free.
What Can We Tell From Arista Networks' ROCE Trend?
Arista Networks deserves to be commended in regards to it's returns. The company has employed 184% more capital in the last five years, and the returns on that capital have remained stable at 28%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Arista Networks can keep this up, we'd be very optimistic about its future.
Our Take On Arista Networks' ROCE
Arista Networks has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And long term investors would be thrilled with the 146% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
One more thing to note, we've identified 1 warning sign with Arista Networks and understanding it should be part of your investment process.
Arista Networks is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
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