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Returns On Capital - An Important Metric For Teradyne (NASDAQ:TER)

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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Teradyne (NASDAQ:TER) we really liked what we saw.

What is 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. The formula for this calculation on Teradyne is:

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

0.31 = US$902m ÷ (US$3.7b - US$701m) (Based on the trailing twelve months to December 2020).

Thus, Teradyne has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 9.9% earned by companies in a similar industry.

See our latest analysis for Teradyne

roce
roce

Above you can see how the current ROCE for Teradyne compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Teradyne.

So How Is Teradyne's ROCE Trending?

Teradyne is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 31%. Basically the business is earning more per dollar of capital invested and in addition to that, 36% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Teradyne's ROCE

To sum it up, Teradyne has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 1 warning sign for Teradyne you'll probably want to know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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.

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