What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at CEVA (NASDAQ:CEVA) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on CEVA is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = US$4.4m ÷ (US$319m - US$32m) (Based on the trailing twelve months to June 2022).
So, CEVA has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 15%.
Above you can see how the current ROCE for CEVA 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 report for CEVA.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at CEVA, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.9% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On CEVA's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for CEVA. And there could be an opportunity here if other metrics look good too, because the stock has declined 39% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
CEVA does have some risks though, and we've spotted 1 warning sign for CEVA that you might be interested in.
While CEVA may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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.
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