The Return Trends At Radware (NASDAQ:RDWR) Look Promising

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. 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. With that in mind, we've noticed some promising trends at Radware (NASDAQ:RDWR) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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 Radware:

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

0.044 = US$20m ÷ (US$618m - US$152m) (Based on the trailing twelve months to March 2022).

Thus, Radware has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 8.2%.

See our latest analysis for Radware

Above you can see how the current ROCE for Radware compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Radware here for free.

What The Trend Of ROCE Can Tell Us

Radware has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 4.4% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Radware is utilizing 35% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Our Take On Radware's ROCE

Overall, Radware gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 38% to shareholders. So with that in mind, we think the stock deserves further research.

On a separate note, we've found 2 warning signs for Radware you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.