If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Photronics (NASDAQ:PLAB) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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

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

0.14 = US$222m ÷ (US$1.7b - US$184m) (Based on the trailing twelve months to October 2024).

Therefore, Photronics has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 8.6% it's much better.

See our latest analysis for Photronics

Above you can see how the current ROCE for Photronics 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 Photronics .

What Can We Tell From Photronics' ROCE Trend?

We like the trends that we're seeing from Photronics. Over the last five years, returns on capital employed have risen substantially to 14%. The amount of capital employed has increased too, by 58%. So we're very much inspired by what we're seeing at Photronics thanks to its ability to profitably reinvest capital.

In Conclusion...

All in all, it's terrific to see that Photronics is reaping the rewards from prior investments and is growing its capital base. And with a respectable 70% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Photronics can keep these trends up, it could have a bright future ahead.

Photronics does have some risks though, and we've spotted 1 warning sign for Photronics that you might be interested in.

While Photronics 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.