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What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. So when we looked at Abbott Laboratories (NYSE:ABT) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Abbott Laboratories:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$7.6b ÷ (US$74b - US$15b) (Based on the trailing twelve months to September 2024).
So, Abbott Laboratories has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Medical Equipment industry.
Check out our latest analysis for Abbott Laboratories
Above you can see how the current ROCE for Abbott Laboratories compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Abbott Laboratories .
What Can We Tell From Abbott Laboratories' ROCE Trend?
Abbott Laboratories has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 60% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
Our Take On Abbott Laboratories' ROCE
To bring it all together, Abbott Laboratories has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 38% to shareholders. So with that in mind, we think the stock deserves further research.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for ABT on our platform that is definitely worth checking out.