If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, 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. With that in mind, the ROCE of Intel (NASDAQ:INTC) looks decent, right now, so lets see what the trend of returns can tell us.
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. Analysts use this formula to calculate it for Intel:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$23b ÷ (US$168b - US$30b) (Based on the trailing twelve months to September 2021).
So, Intel has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Semiconductor industry average of 14%.
In the above chart we have measured Intel's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Intel here for free.
What The Trend Of ROCE Can Tell Us
While the current returns on capital are decent, they haven't changed much. The company has employed 50% more capital in the last five years, and the returns on that capital have remained stable at 17%. 17% is a pretty standard return, and it provides some comfort knowing that Intel has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
What We Can Learn From Intel's ROCE
To sum it up, Intel has simply been reinvesting capital steadily, at those decent rates of return. And the stock has followed suit returning a meaningful 58% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
One more thing, we've spotted 1 warning sign facing Intel that you might find interesting.
While Intel isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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