Sonic Healthcare (ASX:SHL) Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after investigating Sonic Healthcare (ASX:SHL), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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 Sonic Healthcare, this is the formula:

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

0.071 = AU$934m ÷ (AU$15b - AU$2.2b) (Based on the trailing twelve months to December 2024).

So, Sonic Healthcare has an ROCE of 7.1%. On its own, that's a low figure but it's around the 8.5% average generated by the Healthcare industry.

See our latest analysis for Sonic Healthcare

Above you can see how the current ROCE for Sonic Healthcare compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sonic Healthcare for free.

What The Trend Of ROCE Can Tell Us

The trend of ROCE doesn't look fantastic because it's fallen from 9.4% five years ago, while the business's capital employed increased by 50%. Usually this isn't ideal, but given Sonic Healthcare conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Sonic Healthcare probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

Our Take On Sonic Healthcare's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Sonic Healthcare is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 36% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Like most companies, Sonic Healthcare does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.