Yahoo Finance Teradyne (NASDAQ:TER) Is Investing Its Capital With Increasing Efficiency
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Teradyne's (NASDAQ:TER) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Teradyne is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.35 = US$1.1b ÷ (US$4.0b - US$985m) (Based on the trailing twelve months to July 2021).
Thus, Teradyne has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 11%.
Check out our latest analysis for Teradyne
In the above chart we have measured Teradyne's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
Investors would be pleased with what's happening at Teradyne. Over the last five years, returns on capital employed have risen substantially to 35%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 54%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
Our Take On Teradyne's ROCE
All in all, it's terrific to see that Teradyne is reaping the rewards from prior investments and is growing its capital base. And a remarkable 567% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you'd like to know about the risks facing Teradyne, we've discovered 1 warning sign that you should be aware of.
Teradyne is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
This article by Simply Wall St is general in nature. 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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