Why The 47% Return On Capital At Pro Medicus (ASX:PME) Should Have Your Attention

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at Pro Medicus' (ASX:PME) look very promising so lets take a look.

What Is 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 Pro Medicus is:

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 9.0%.

View our latest analysis for Pro Medicus

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Pro Medicus' ROCE Trend?

We like the trends that we're seeing from Pro Medicus. Over the last five years, returns on capital employed have risen substantially to 47%. 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 242%. So we're very much inspired by what we're seeing at Pro Medicus thanks to its ability to profitably reinvest capital.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Pro Medicus has. Since the stock has returned a staggering 690% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Pro Medicus, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.