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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. That's why when we briefly looked at Elevance Health's (NYSE:ELV) ROCE trend, we were pretty happy with what we saw.
Return On Capital Employed (ROCE): What Is It?
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 Elevance Health:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$10b ÷ (US$117b - US$40b) (Based on the trailing twelve months to December 2024).
Thus, Elevance Health has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 10% it's much better.
See our latest analysis for Elevance Health
Above you can see how the current ROCE for Elevance Health 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 Elevance Health for free.
What Can We Tell From Elevance Health's ROCE Trend?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 42% more capital into its operations. 13% is a pretty standard return, and it provides some comfort knowing that Elevance Health has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
In Conclusion...
The main thing to remember is that Elevance Health has proven its ability to continually reinvest at respectable rates of return. Therefore it's no surprise that shareholders have earned a respectable 48% return if they held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
Elevance Health could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for ELV on our platform quite valuable.