Monday, September 26, 2022

Investors should be encouraged by Cadence Design Systems’ (NASDAQ:CDNS) return on capital

If you’re looking for a multi-bagger, there are a few things to keep in mind. First, we would like to see a proven Return on capital employed (ROCE) which is increasing, and second, an expansion base of capital employed. If you look at this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. With this in mind, the ROCE of Cadence Design Systems (NASDAQ:CDNS) is looking great, so let’s take a look at what the trend can tell us.

Understanding Return on Capital Employed (ROCE)

Just to clarify if you’re unsure, ROCE is a metric to evaluate how much pre-tax income (in percentage terms) a company makes on capital invested in its business. To calculate this metric for Cadence Design Systems, this is the formula:

Return on Capital Employed = Earnings Before Interest and Taxes (EBIT) (Total Assets – Current Liabilities)

0.23 = US$778m (US$4.4b – US$971m) (Based on last twelve months to January 2022),

therefore, Cadence Design Systems has a ROCE of 23%. This is a great return in absolute terms and it is even better than the software industry average of 9.4%.

See our latest analysis for Cadence Design Systems

NasdaqGS: CDNS Return on Capital Employed as on April 10, 2022

Above you can see how the current ROCE for Cadence Design Systems compares to its prior return on capital, but there’s only so much you can tell from the past. If you prefer, you can check out forecasts from analysts covering Cadence Design Systems here free.

ROCE. trend of

We love the trends we’re seeing from Cadence Design Systems. Statistics show that in the last five years, the return on capital employed has increased significantly to 23%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital also increased by 126%. Increasing return on increasing amount of capital is common among multiple-baggers and hence we are impressed.


To sum it up, Cadence Design Systems has proven that it can reinvest in business and generate high return on capital, which is awesome. Since the stock has delivered a staggering 409% return to shareholders over the past five years, it seems that investors are recognizing these changes. That being said, we still think promising fundamentals mean the company deserves some more due diligence.

On the other side of ROCE, we have to consider valuation. so we have one Free Intrinsic Value Estimation on our Platform Which is definitely worth checking out.

High returns are a key component to strong performance, so check out our free List of stocks earning high return on equity with solid balance sheet.

This article by Simple Wall St. is general in nature. We only provide commentary based on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to be financial advice. It does not recommend buying or selling any stock, and does not take into account your objectives, or your financial situation. Our goal is to bring you long term focused analysis powered by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative content. Simple Wall St does not have a position in any of the stocks mentioned.

Nation World News Desk
Nation World News Desk
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