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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Photronics (NASDAQ:PLAB) so let's look a bit deeper.
Our free stock report includes 2 warning signs investors should be aware of before investing in Photronics. Read for free now.
What Is 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. The formula for this calculation on Photronics is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$216m ÷ (US$1.7b - US$163m) (Based on the trailing twelve months to February 2025).
So, Photronics has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 8.0% it's much better.
Check out our latest analysis for Photronics
In the above chart we have measured Photronics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Photronics .
What Does the ROCE Trend For Photronics Tell Us?
We like the trends that we're seeing from Photronics. The data shows that returns on capital have increased substantially over the last five years to 14%. 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 59%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Key Takeaway
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 with a respectable 60% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. 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.
If you'd like to know more about Photronics, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.