Yahoo Finance We Like These Underlying Return On Capital Trends At Alcon (VTX:ALC)
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Alcon (VTX:ALC) looks quite promising in regards to its trends of return on capital.
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. To calculate this metric for Alcon, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = US$966m ÷ (US$28b - US$2.3b) (Based on the trailing twelve months to September 2022).
Thus, Alcon has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 8.7%.
See our latest analysis for Alcon
Above you can see how the current ROCE for Alcon 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 Alcon here for free.
How Are Returns Trending?
While there are companies with higher returns on capital out there, we still find the trend at Alcon promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 1,716% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
In Conclusion...
To bring it all together, Alcon has done well to increase the returns it's generating from its capital employed. Considering the stock has delivered 15% to its stockholders over the last three years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
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.
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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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