What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Razer (HKG:1337) looks quite promising in regards to its trends of return on capital.
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 Razer:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) (Total Assets – Current Liabilities)
0.089 = US$52m (US$1.2b – US$643m) (Based on the trailing twelve months to December 2021),
Thus, Razer has an ROCE of 8.9%. On its own, that’s a low figure but it’s around the 7.8% average generated by the Tech industry.
Check out our latest analysis for Razer
Above you can see how the current ROCE for Razer compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Razer Tell Us?
Razer has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it’s earning 8.9% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Razer is utilizing 284% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
On a separate but related note, it’s important to know that Razer has a current liabilities to total assets ratio of 52%, which we’d consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
What We Can Learn From Razer’s ROCE
Overall, Razer gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 39% return over the last three years. 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.
On the other side of ROCE, we have to consider valuation. That’s why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
While Razer 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.
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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.