We Like These Underlying Return On Capital Trends At PDF Solutions (NASDAQ:PDFS)
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at PDF Solutions (NASDAQ:PDFS) and its trend of ROCE, 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. To calculate this metric for PDF Solutions, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0088 = US$2.1m ÷ (US$282m - US$50m) (Based on the trailing twelve months to September 2023).
So, PDF Solutions has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 11%.
See our latest analysis for PDF Solutions
Above you can see how the current ROCE for PDF Solutions 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 PDF Solutions here for free.
What The Trend Of ROCE Can Tell Us
PDF Solutions has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 0.9% on its capital. While returns have increased, the amount of capital employed by PDF Solutions has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.
Our Take On PDF Solutions' ROCE
To sum it up, PDF Solutions is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 233% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
PDF Solutions does have some risks though, and we've spotted 1 warning sign for PDF Solutions that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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.
