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What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Micron Technology (NASDAQ:MU) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. Analysts use this formula to calculate it for Micron Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = US$4.5b ÷ (US$71b - US$9.0b) (Based on the trailing twelve months to November 2024).
So, Micron Technology has an ROCE of 7.3%. In absolute terms, that's a low return but it's around the Semiconductor industry average of 8.6%.
View our latest analysis for Micron Technology
In the above chart we have measured Micron Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Micron Technology .
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Micron Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.5% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On Micron Technology's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Micron Technology. And the stock has followed suit returning a meaningful 76% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
One more thing, we've spotted 1 warning sign facing Micron Technology that you might find interesting.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.