Investors Should Be Encouraged By Sonic Healthcare's (ASX:SHL) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So when we looked at the ROCE trend of Sonic Healthcare (ASX:SHL) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Sonic Healthcare is:

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

0.21 = AU$2.2b ÷ (AU$13b - AU$2.1b) (Based on the trailing twelve months to June 2022).

So, Sonic Healthcare has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Healthcare industry average of 8.4%.

See our latest analysis for Sonic Healthcare

In the above chart we have measured Sonic Healthcare'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 Sonic Healthcare here for free.

How Are Returns Trending?

Investors would be pleased with what's happening at Sonic Healthcare. Over the last five years, returns on capital employed have risen substantially to 21%. Basically the business is earning more per dollar of capital invested and in addition to that, 67% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On Sonic Healthcare's ROCE

All in all, it's terrific to see that Sonic Healthcare is reaping the rewards from prior investments and is growing its capital base. And with a respectable 74% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 2 warning signs with Sonic Healthcare (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.