Yahoo Finance Investors Shouldn't Overlook The Favourable Returns On Capital At Arista Networks (NYSE:ANET)
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Arista Networks (NYSE:ANET) looks attractive right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Arista Networks is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = US$2.4b ÷ (US$11b - US$1.8b) (Based on the trailing twelve months to March 2024).
Therefore, Arista Networks has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 8.1% earned by companies in a similar industry.
See our latest analysis for Arista Networks
In the above chart we have measured Arista Networks' 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 Arista Networks for free.
What Can We Tell From Arista Networks' ROCE Trend?
Arista Networks deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 28% and the business has deployed 214% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.
The Bottom Line
In short, we'd argue Arista Networks has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 427% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
On a final note, we've found 1 warning sign for Arista Networks that we think you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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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