Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. First, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 ran our eye over Motorola Solutions’ (NYSE:MSI) trend of ROCE, we really liked what we saw.
What is 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. Analysts use this formula to calculate it for Motorola Solutions:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) (Total Assets – Current Liabilities)
0.21 = US$1.7b (US$12b – US$4.1b) (Based on the trailing twelve months to December 2021),
Therefore, Motorola Solutions has an ROCE of 21%. That’s a fantastic return and not only that, it outpaces the average of 7.3% earned by companies in a similar industry.
See our latest analysis for Motorola Solutions
Above you can see how the current ROCE for Motorola Solutions 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 Motorola Solutions here for free.
How Are Returns Trending?
We’d be pretty happy with returns on capital like Motorola Solutions. Over the past five years, ROCE has remained relatively flat at around 21% and the business has deployed 40% more capital into its operations. With returns that high, it’s great that the business can continually reinvest its money at such appealing rates of return. If Motorola Solutions can keep this up, we’d be very optimistic about its future.
The Key Takeaway
In short, we’d argue Motorola Solutions has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 196% return to those who’ve held over the last five years. So while investors seem to be these promising trends, we still believe the stock deserves further research.
Motorola Solutions does have some risks though, and we’ve spotted 3 warning signs for Motorola Solutions that you might be interested in.
Motorola Solutions 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.