The Returns On Capital At ADTRAN Holdings (NASDAQ:ADTN) Don't Inspire Confidence
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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. 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 ADTRAN Holdings (NASDAQ:ADTN) 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. Analysts use this formula to calculate it for ADTRAN Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0024 = US$3.3m ÷ (US$1.9b - US$489m) (Based on the trailing twelve months to December 2022).
Thus, ADTRAN Holdings has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Communications industry average of 11%.
View our latest analysis for ADTRAN Holdings
Above you can see how the current ROCE for ADTRAN Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering ADTRAN Holdings here for free.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at ADTRAN Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.2% from 6.8% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On ADTRAN Holdings' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that ADTRAN Holdings is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 19% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
On a separate note, we've found 3 warning signs for ADTRAN Holdings you'll probably want to know about.
While ADTRAN Holdings 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.
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