Photronics (NASDAQ:PLAB) Might Have The Makings Of A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. With that in mind, we've noticed some promising trends at Photronics (NASDAQ:PLAB) so let's look a bit deeper.

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. To calculate this metric for Photronics, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.19 = US$249m ÷ (US$1.5b - US$191m) (Based on the trailing twelve months to July 2023).

Thus, Photronics has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 11% it's much better.

Check out our latest analysis for Photronics

In the above chart we have measured Photronics' 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 report for Photronics.

How Are Returns Trending?

Investors would be pleased with what's happening at Photronics. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 41% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

To sum it up, Photronics has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 108% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

While Photronics isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.