Palo Alto Networks (NASDAQ:PANW) Is Doing The Right Things To Multiply Its Share Price

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Palo Alto Networks' (NASDAQ:PANW) returns on capital, so let's have a look.

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 Palo Alto Networks is:

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

0.0049 = US$23m ÷ (US$13b - US$8.5b) (Based on the trailing twelve months to January 2023).

Therefore, Palo Alto Networks has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Software industry average of 9.5%.

View our latest analysis for Palo Alto Networks

Above you can see how the current ROCE for Palo Alto Networks 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 Palo Alto Networks.

What Does the ROCE Trend For Palo Alto Networks 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 0.5% which is a sight for sore eyes. In addition to that, Palo Alto Networks is employing 165% 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.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 64% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Palo Alto Networks' ROCE

Overall, Palo Alto Networks gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 196% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Palo Alto Networks can keep these trends up, it could have a bright future ahead.

Palo Alto Networks does have some risks though, and we've spotted 3 warning signs for Palo Alto Networks that you might be interested in.

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.