Why You Should Care About Cochlear's (ASX:COH) Strong Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Cochlear's (ASX:COH) ROCE trend, we were very happy with what we saw.

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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. The formula for this calculation on Cochlear is:

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

0.24 = AU$523m ÷ (AU$2.8b - AU$626m) (Based on the trailing twelve months to December 2024).

So, Cochlear has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

See our latest analysis for Cochlear

Above you can see how the current ROCE for Cochlear compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Cochlear .

What The Trend Of ROCE Can Tell Us

We'd be pretty happy with returns on capital like Cochlear. Over the past five years, ROCE has remained relatively flat at around 24% and the business has deployed 67% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Cochlear can keep this up, we'd be very optimistic about its future.

The Bottom Line

In short, we'd argue Cochlear has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has followed suit returning a meaningful 48% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

While Cochlear looks impressive, no company is worth an infinite price. The intrinsic value infographic for COH helps visualize whether it is currently trading for a fair price.

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.