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

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Pro Medicus' (ASX:PME) returns on capital, so let's have a look.

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 Pro Medicus:

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

0.47 = AU$71m ÷ (AU$175m - AU$25m) (Based on the trailing twelve months to December 2022).

Thus, Pro Medicus has an ROCE of 47%. In absolute terms that's a great return and it's even better than the Healthcare Services industry average of 8.4%.

Check out our latest analysis for Pro Medicus

In the above chart we have measured Pro Medicus' 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 Pro Medicus here for free.

SWOT Analysis for Pro Medicus

What Can We Tell From Pro Medicus' ROCE Trend?

Pro Medicus is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 47%. Basically the business is earning more per dollar of capital invested and in addition to that, 242% more capital is being employed now too. So we're very much inspired by what we're seeing at Pro Medicus thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, Pro Medicus has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 707% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know more about Pro Medicus, we've spotted 2 warning signs, and 1 of them is potentially serious.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.