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. 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, the ROCE of Micron Technology (NASDAQ:MU) looks decent, right now, so lets see what the trend of returns can tell us.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Micron Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$9.7b ÷ (US$66b - US$7.5b) (Based on the trailing twelve months to September 2022).
Thus, Micron Technology has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Semiconductor industry average of 16%.
Above you can see how the current ROCE for Micron Technology 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 report for Micron Technology.
How Are Returns Trending?
While the current returns on capital are decent, they haven't changed much. The company has employed 96% more capital in the last five years, and the returns on that capital have remained stable at 17%. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line On Micron Technology's ROCE
The main thing to remember is that Micron Technology has proven its ability to continually reinvest at respectable rates of return. Therefore it's no surprise that shareholders have earned a respectable 41% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
On a final note, we've found 1 warning sign for Micron Technology that we think you should be aware of.
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.
What are the risks and opportunities for Micron Technology?
Price-To-Earnings ratio (11.1x) is below the US market (15.4x)
Earnings are forecast to grow 58.78% per year
Significant insider selling over the past 3 months
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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.