If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at Teradyne (NASDAQ:TER) and its ROCE trend, we weren’t exactly thrilled.
What Is Return On Capital Employed (ROCE)?
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 Teradyne is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.18 = US$504m ÷ (US$3.4b – US$554m) (Based on the trailing twelve months to March 2024).
Thus, Teradyne has an ROCE of 18%. In absolute terms, that’s a satisfactory return, but compared to the Semiconductor industry average of 9.7% it’s much better.
Check out our latest analysis for Teradyne
Above you can see how the current ROCE for Teradyne 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 Teradyne .
What Can We Tell From Teradyne’s ROCE Trend?
On the surface, the trend of ROCE at Teradyne doesn’t inspire confidence. To be more specific, ROCE has fallen from 23% over the last five years. And considering revenue has dropped while employing more capital, we’d be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven’t increased.
In Conclusion…
We’re a bit apprehensive about Teradyne because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 219% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don’t bode well for long term performance so unless they reverse, we’d start looking elsewhere.
If you’re still interested in Teradyne it’s worth checking out our FREE intrinsic value approximation for TER to see if it’s trading at an attractive price in other respects.
While Teradyne isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Valuation is complex, but we’re helping make it simple.
Find out whether Teradyne is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
