In This Article:
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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Palo Alto Networks (NASDAQ:PANW) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Palo Alto Networks:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = US$1.2b ÷ (US$22b - US$7.7b) (Based on the trailing twelve months to April 2025).
So, Palo Alto Networks has an ROCE of 8.2%. On its own, that's a low figure but it's around the 9.9% average generated by the Software industry.
View our latest analysis for Palo Alto Networks
Above you can see how the current ROCE for Palo Alto Networks 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 Palo Alto Networks .
What The Trend Of ROCE Can Tell Us
Palo Alto Networks 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 8.2% which is a sight for sore eyes. In addition to that, Palo Alto Networks is employing 243% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
What We Can Learn From Palo Alto Networks' ROCE
Long story short, we're delighted to see that Palo Alto Networks' reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 376% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.