If we want to find a stock that can multiply over the long term, what underlying trends should we look for? In a perfect world, we would like to see a company invest more capital in its operations and ideally the returns on that capital also increase. Basically, this means that a company has profitable initiatives in which it can continue to reinvest, which is a hallmark of a compounding machine. So when we looked Check Point Software Technologies (NASDAQ:CHKP), they do have a high ROCE, but we weren’t exactly thrilled with the trend returns.
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its rate of return), relative to the capital invested in the company. To calculate this metric for Check Point Software Technologies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.23 = US$874m (US$5.5bn – US$1.7bn) (Based on the last twelve months to September 2024).
So, Check Point Software Technologies has a ROCE of 23%. That’s a fantastic return, and not only that: it beats the average of 8.8% that companies in a similar sector earn.
Check out our latest analysis for Check Point Software Technologies
In the chart above, we compared Check Point Software Technologies’ past ROCE to its past performance, but the future is arguably more important. If you’re interested, you can check out the analyst forecasts in our free analyst report for Check Point Software Technologies.
At Check Point Software Technologies, business has remained fairly stable, with capital invested and the return on that capital remaining more or less the same over the past five years. Companies with these characteristics are usually mature and stable, because they have left the growth phase behind them. So while the current business is delivering respectable returns, unless capital invested increases, we’d be hard-pressed to believe it’s a multi-bagger in the future.
Although Check Point Software Technologies is generating impressive profitability from its capital, it is not increasing that amount. Considering the stock has gained an impressive 68% over the past five years, investors must think better things are ahead. Ultimately, if the underlying trends continue, we can’t assume this will be a multi-bagger.
