Returns on Capital Paint A Bright Future For Pro Medicus (ASX:PME)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, the ROCE of Pro Medicus (ASX:PME) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Pro Medicus, this is the formula:

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

0.48 = AU$62m ÷ (AU$157m - AU$27m) (Based on the trailing twelve months to June 2022).

Thus, Pro Medicus has an ROCE of 48%. In absolute terms that's a great return and it's even better than the Healthcare Services industry average of 10%.

Our analysis indicates that PME is potentially overvalued!

Above you can see how the current ROCE for Pro Medicus 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 report for Pro Medicus.

What Can We Tell From Pro Medicus' ROCE Trend?

The trends we've noticed at Pro Medicus are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 48%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 226%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In Conclusion...

All in all, it's terrific to see that Pro Medicus is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 736% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

Pro Medicus 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.