Some Investors May Be Worried About Cochlear's (ASX:COH) Returns On Capital

If you're looking for a multi-bagger, there's a few things to 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 while Cochlear (ASX:COH) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Cochlear:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.24 = AU$510m ÷ (AU$2.7b - AU$632m) (Based on the trailing twelve months to June 2024).

So, Cochlear has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 6.9% earned by companies in a similar industry.

View our latest analysis for Cochlear

In the above chart we have measured Cochlear'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 Cochlear for free.

So How Is Cochlear's ROCE Trending?

On the surface, the trend of ROCE at Cochlear doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 35% where it was five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Cochlear is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 39% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Cochlear could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for COH on our platform quite valuable.

Cochlear is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.