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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Photronics (NASDAQ:PLAB) so let's look a bit deeper.
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. The formula for this calculation on Photronics is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$244m ÷ (US$1.6b - US$196m) (Based on the trailing twelve months to April 2024).
Therefore, Photronics has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 9.7% it's much better.
Above you can see how the current ROCE for Photronics 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 analyst report for Photronics .
The Trend Of ROCE
Investors would be pleased with what's happening at Photronics. The data shows that returns on capital have increased substantially over the last five years to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 49%. So we're very much inspired by what we're seeing at Photronics thanks to its ability to profitably reinvest capital.
Our Take On Photronics' ROCE
To sum it up, Photronics has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 225% 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 Photronics can keep these trends up, it could have a bright future ahead.
While Photronics looks impressive, no company is worth an infinite price. The intrinsic value infographic for PLAB helps visualize whether it is currently trading for a fair price.
While Photronics isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.