There's Been No Shortage Of Growth Recently For Cirrus Logic's (NASDAQ:CRUS) Returns On Capital
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Cirrus Logic (NASDAQ:CRUS) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
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 Cirrus Logic:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$327m ÷ (US$2.2b - US$179m) (Based on the trailing twelve months to December 2023).
Therefore, Cirrus Logic has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 11% it's much better.
See our latest analysis for Cirrus Logic
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'd like, you can check out the forecasts from the analysts covering Cirrus Logic for free.
What The Trend Of ROCE Can Tell Us
Investors would be pleased with what's happening at Cirrus Logic. Over the last five years, returns on capital employed have risen substantially to 16%. The amount of capital employed has increased too, by 66%. So we're very much inspired by what we're seeing at Cirrus Logic thanks to its ability to profitably reinvest capital.
The Bottom Line On Cirrus Logic's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Cirrus Logic has. Since the stock has returned a staggering 124% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
