We Think Cadence Design Systems (NASDAQ:CDNS) Might Have The DNA Of A Multi-Bagger

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Cadence Design Systems (NASDAQ:CDNS) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Cadence Design Systems is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.29 = US$1.1b ÷ (US$5.0b – US$1.3b) (Based on the trailing twelve months to October 2022).

Thus, Cadence Design Systems has an ROCE of 29%. That’s a fantastic return and not only that, it outpaces the average of 10.0% earned by companies in a similar industry.

View our latest analysis for Cadence Design Systems

NasdaqGS:CDNS Return on Capital Employed January 29th 2023

Above you can see how the current ROCE for Cadence Design Systems 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 report for Cadence Design Systems.

How Are Returns Trending?

The trends we’ve noticed at Cadence Design Systems are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 29%. Basically the business is earning more per dollar of capital invested and in addition to that, 108% more capital is being employed now too. So we’re very much inspired by what we’re seeing at Cadence Design Systems thanks to its ability to profitably reinvest capital.

The Bottom Line On Cadence Design Systems’ ROCE

All in all, it’s terrific to see that Cadence Design Systems is reaping the rewards from prior investments and is growing its capital base. And a remarkable 350% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it’s worth looking further into this stock because if Cadence Design Systems can keep these trends up, it could have a bright future ahead.

If you want to continue researching Cadence Design Systems, you might be interested to know about the 1 warning sign that our analysis has discovered.

Cadence Design Systems 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.

What are the risks and opportunities for Cadence Design Systems?

Cadence Design Systems, Inc. provides software, hardware, services, and reusable integrated circuit (IC) design blocks worldwide.

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  • Earnings are forecast to grow 17.2% per year

  • Earnings grew by 13.3% over the past year


  • Significant insider selling over the past 3 months

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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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