In This Article:
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Sonic Healthcare (ASX:SHL), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Sonic Healthcare:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = AU$934m ÷ (AU$15b - AU$2.2b) (Based on the trailing twelve months to December 2024).
Therefore, Sonic Healthcare has an ROCE of 7.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.4%.
See our latest analysis for Sonic Healthcare
In the above chart we have measured Sonic Healthcare's 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 Sonic Healthcare for free.
What Can We Tell From Sonic Healthcare's ROCE Trend?
Unfortunately, the trend isn't great with ROCE falling from 9.4% five years ago, while capital employed has grown 50%. Usually this isn't ideal, but given Sonic Healthcare conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Sonic Healthcare probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
The Key Takeaway
While returns have fallen for Sonic Healthcare in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 11% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
One more thing, we've spotted 1 warning sign facing Sonic Healthcare that you might find interesting.