If we want to find a stock that could multiply over the long term, what underlying trends should we look for? Among other things, we want to see two things; First, a growing one return on the capital employed (ROCE) and, secondly, an expansion of the company quantity of the capital employed. Put simply, these types of businesses are compounding machines, which means that they are continually reinvesting their profits with ever higher returns. So when we ran our eye over VMware’s (NYSE: VMW) Trend from ROCE, we liked what we saw.
What is return on capital employed (ROCE)?
If you’ve never worked with ROCE, it measures the “return on investment” (pre-tax profit) a company generates from the capital invested in its business. The formula for this calculation under VMware is:
Return on investment = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.11 = $ 2.3 billion ($ 29 billion – $ 8.4 billion) (Based on the last twelve months through January 2021).
So, VMware has a ROCE of 11%. By…