We Like These Underlying Return On Capital Trends At FARO Technologies (NASDAQ:FARO)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, FARO Technologies (NASDAQ:FARO) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on FARO Technologies is:

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

0.027 = US$10m ÷ (US$490m - US$113m) (Based on the trailing twelve months to September 2024).

Thus, FARO Technologies has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10%.

Check out our latest analysis for FARO Technologies

In the above chart we have measured FARO Technologies' 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 FARO Technologies .

How Are Returns Trending?

Shareholders will be relieved that FARO Technologies has broken into profitability. The company now earns 2.7% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by FARO Technologies has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line On FARO Technologies' ROCE

In summary, we're delighted to see that FARO Technologies has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Astute investors may have an opportunity here because the stock has declined 47% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One final note, you should learn about the 4 warning signs we've spotted with FARO Technologies (including 1 which is concerning) .

While FARO Technologies 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.