If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. However, after investigating Cisco Systems (NASDAQ:CSCO), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Cisco Systems:

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

0.16 = US$13b ÷ (US$124b - US$41b) (Based on the trailing twelve months to July 2024).

Therefore, Cisco Systems has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Communications industry.

Above you can see how the current ROCE for Cisco Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Cisco Systems .

What Does the ROCE Trend For Cisco Systems Tell Us?

On the surface, the trend of ROCE at Cisco Systems doesn't inspire confidence. Over the last five years, returns on capital have decreased to 16% from 22% five years ago. However it looks like Cisco Systems might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Cisco Systems' ROCE

Bringing it all together, while we're somewhat encouraged by Cisco Systems' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 18% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Cisco Systems could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for CSCO on our platform quite valuable.

While Cisco Systems may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.