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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? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Onto Innovation (NYSE:ONTO) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Onto Innovation, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$201m ÷ (US$2.1b - US$170m) (Based on the trailing twelve months to December 2024).
Therefore, Onto Innovation has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 7.3% generated by the Semiconductor industry.
View our latest analysis for Onto Innovation
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 to see what analysts are forecasting going forward, you should check out our free analyst report for Onto Innovation .
What Does the ROCE Trend For Onto Innovation Tell Us?
Onto Innovation is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 10%. Basically the business is earning more per dollar of capital invested and in addition to that, 46% more capital is being employed now too. So we're very much inspired by what we're seeing at Onto Innovation thanks to its ability to profitably reinvest capital.
Our Take On 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. Since the stock has returned a staggering 403% 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.
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.