Yahoo Finance McAfee (NASDAQ:MCFE) Is Investing Its Capital With Increasing Efficiency
If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at McAfee's (NASDAQ:MCFE) look very promising so lets take a look.
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. To calculate this metric for McAfee, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = US$437m ÷ (US$3.5b - US$1.7b) (Based on the trailing twelve months to September 2021).
Therefore, McAfee has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Software industry average of 11%.
View our latest analysis for McAfee
In the above chart we have measured McAfee's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is McAfee's ROCE Trending?
We're pretty happy with how the ROCE has been trending at McAfee. The data shows that returns on capital have increased by 1,210% over the trailing two years. The company is now earning US$0.2 per dollar of capital employed. In regards to capital employed, McAfee appears to been achieving more with less, since the business is using 53% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 49% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.
The Bottom Line On McAfee's ROCE
In summary, it's great to see that McAfee has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has returned a solid 62% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you want to know some of the risks facing McAfee we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.
McAfee is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
