There Are Reasons To Feel Uneasy About Ciena's (NYSE:CIEN) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. In light of that, when we looked at Ciena (NYSE:CIEN) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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

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

0.06 = US$282m ÷ (US$5.6b - US$912m) (Based on the trailing twelve months to April 2024).

So, Ciena has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 8.1%.

View our latest analysis for Ciena

Above you can see how the current ROCE for Ciena compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Ciena .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Ciena, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.0% from 11% five years ago. However it looks like Ciena might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Ciena's ROCE

To conclude, we've found that Ciena is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 17% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Ciena could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for CIEN on our platform quite valuable.

While Ciena may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.

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