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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. 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. So when we looked at Palo Alto Networks (NASDAQ:PANW) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Palo Alto Networks is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = US$1.1b ÷ (US$21b - US$7.6b) (Based on the trailing twelve months to January 2025).
So, Palo Alto Networks has an ROCE of 8.4%. On its own, that's a low figure but it's around the 9.7% average generated by the Software industry.
View our latest analysis for Palo Alto Networks
In the above chart we have measured Palo Alto Networks' 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 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 8.4% which is a sight for sore eyes. In addition to that, Palo Alto Networks is employing 171% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
What We Can Learn From Palo Alto Networks' ROCE
In summary, it's great to see that Palo Alto Networks has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 411% 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.