To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Onto Innovation's (NYSE:ONTO) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Onto Innovation:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = US$173m ÷ (US$2.1b - US$145m) (Based on the trailing twelve months to September 2024).
So, Onto Innovation has an ROCE of 9.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.6%.
In the above chart we have measured Onto Innovation's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Onto Innovation for free.
What Can We Tell From Onto Innovation's ROCE Trend?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.0%. 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 376%. So we're very much inspired by what we're seeing at Onto Innovation thanks to its ability to profitably reinvest capital.
What We Can Learn From Onto Innovation's ROCE
To sum it up, Onto Innovation has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 397% 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 Onto Innovation can keep these trends up, it could have a bright future ahead.
While Onto Innovation looks impressive, no company is worth an infinite price. The intrinsic value infographic for ONTO helps visualize whether it is currently trading for a fair price.
While Onto Innovation 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.
