Yahoo Finance The Trends At Laboratory Corporation of America Holdings (NYSE:LH) That You Should Know About
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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Laboratory Corporation of America Holdings (NYSE:LH), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
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 Laboratory Corporation of America Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.089 = US$1.3b ÷ (US$18b - US$3.0b) (Based on the trailing twelve months to June 2020).
Therefore, Laboratory Corporation of America Holdings has an ROCE of 8.9%. On its own, that's a low figure but it's around the 9.8% average generated by the Healthcare industry.
Check out our latest analysis for Laboratory Corporation of America Holdings
In the above chart we have measured Laboratory Corporation of America Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Laboratory Corporation of America Holdings here for free.
What Does the ROCE Trend For Laboratory Corporation of America Holdings Tell Us?
Over the past five years, Laboratory Corporation of America Holdings' ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Laboratory Corporation of America Holdings doesn't end up being a multi-bagger in a few years time.
The Key Takeaway
In a nutshell, Laboratory Corporation of America Holdings has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 67% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
On a final note, we've found 3 warning signs for Laboratory Corporation of America Holdings that we think you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.
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