If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. 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 the ROCE trend of Pro Medicus (ASX:PME) we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Pro Medicus is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.47 = AU$71m ÷ (AU$175m - AU$25m) (Based on the trailing twelve months to December 2022).
So, Pro Medicus has an ROCE of 47%. In absolute terms that's a great return and it's even better than the Healthcare Services industry average of 8.4%.
View our latest analysis for Pro Medicus
In the above chart we have measured Pro Medicus' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
The trends we've noticed at Pro Medicus are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 47%. The amount of capital employed has increased too, by 242%. So we're very much inspired by what we're seeing at Pro Medicus thanks to its ability to profitably reinvest capital.
The Bottom Line
In summary, it's great to see that Pro Medicus can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 663% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Pro Medicus can keep these trends up, it could have a bright future ahead.
One final note, you should learn about the 2 warning signs we've spotted with Pro Medicus (including 1 which is a bit concerning) .
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.