To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. 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, we've noticed some promising trends at Avnet (NASDAQ:AVT) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Avnet:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = US$736m ÷ (US$12b - US$4.2b) (Based on the trailing twelve months to December 2024).
So, Avnet has an ROCE of 9.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 10%.
See our latest analysis for Avnet
Above you can see how the current ROCE for Avnet compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Avnet .
How Are Returns Trending?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 9.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 34% more capital is being employed now too. So we're very much inspired by what we're seeing at Avnet thanks to its ability to profitably reinvest capital.
The Bottom Line
All in all, it's terrific to see that Avnet is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 70% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Avnet can keep these trends up, it could have a bright future ahead.
Avnet does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.
While Avnet isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.