NVIDIA (NASDAQ:NVDA) Knows How To Allocate Capital
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to...
NVIDIA (NASDAQ:NVDA) Knows How To Allocate Capital
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. With that in mind, the ROCE of NVIDIA (NASDAQ:NVDA) looks attractive right now, so lets see what the trend of returns can tell us.
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. The formula for this calculation on NVIDIA is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = US$9.4b ÷ (US$43b - US$7.6b) (Based on the trailing twelve months to July 2022).
So, NVIDIA has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.
Check out our latest analysis for NVIDIA
In the above chart we have measured NVIDIA's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for NVIDIA.
How Are Returns Trending?
In terms of NVIDIA's history of ROCE, it's quite impressive. The company has consistently earned 26% for the last five years, and the capital employed within the business has risen 328% in that time. Now considering ROCE is an attractive 26%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If NVIDIA can keep this up, we'd be very optimistic about its future.
In Conclusion...
In summary, we're delighted to see that NVIDIA has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has done incredibly well with a 152% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
If you want to continue researching NVIDIA, you might be interested to know about the 1 warning sign that our analysis has discovered.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.
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