Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at Laboratory Corporation of America Holdings (NYSE:LH) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Laboratory Corporation of America Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$2.9b ÷ (US$20b - US$2.6b) (Based on the trailing twelve months to June 2022).
Thus, Laboratory Corporation of America Holdings has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 10% it's much better.
Above you can see how the current ROCE for Laboratory Corporation of America 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 Laboratory Corporation of America Holdings here for free.
What The Trend Of ROCE Can Tell Us
Investors would be pleased with what's happening at Laboratory Corporation of America Holdings. Over the last five years, returns on capital employed have risen substantially to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 35% more capital is being employed now too. So we're very much inspired by what we're seeing at Laboratory Corporation of America Holdings thanks to its ability to profitably reinvest capital.
The Key Takeaway
All in all, it's terrific to see that Laboratory Corporation of America Holdings is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 46% return over the last five years. In light of that, we think it's worth looking further into this stock because if Laboratory Corporation of America Holdings can keep these trends up, it could have a bright future ahead.
Laboratory Corporation of America Holdings does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.
While Laboratory Corporation of America Holdings 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.
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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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