Benzinga | Jul 8, 2021 10:50AM EDT

Broadcom Insights: Return On Capital Employed

Looking at Q2, Broadcom (NASDAQ:AVGO) earned $1.98 billion, a 7.51% increase from the preceding quarter. Broadcom's sales decreased to $6.61 billion, a 0.68% change since Q1. In Q1, Broadcom brought in $6.66 billion in sales but only earned $1.84 billion.

Why ROCE Is Significant

Changes in earnings and sales indicate shifts in Broadcom's Return on Capital Employed, a measure of yearly pre-tax profit relative to capital employed by a business. Generally, a higher ROCE suggests successful growth of a company and is a sign of higher earnings per share in the future. In Q2, Broadcom posted an ROCE of 0.08%.

It is important to keep in mind ROCE evaluates past performance and is not used as a predictive tool. It is a good measure of a company's recent performance, but several factors could affect earnings and sales in the near future.

ROCE is an important metric for the comparison of similar companies. A relatively high ROCE shows Broadcom is potentially operating at a higher level of efficiency than other companies in its industry. If the company is generating high profits with its current level of capital, some of that money can be reinvested in more capital which will generally lead to higher returns and earnings per share growth.

For Broadcom, the return on capital employed ratio shows the number of assets can actually help the company achieve higher returns, an important note investors will take into account when gauging the payoff from long-term financing strategies.

Q2 Earnings Recap

Broadcom reported Q2 earnings per share at $6.62/share, which beat analyst predictions of $6.42/share.