We Like Sonic Healthcare's (ASX:SHL) Returns And Here's How They're Trending

Published
August 07, 2022
ASX:SHL
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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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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)

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 Sonic Healthcare is:

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

0.20 = AU$2.1b ÷ (AU$12b - AU$2.0b) (Based on the trailing twelve months to December 2021).

Thus, Sonic Healthcare has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 6.2% earned by companies in a similar industry.

Check out our latest analysis for Sonic Healthcare

roce
ASX:SHL Return on Capital Employed August 7th 2022

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 here for free.

What Does the ROCE Trend For Sonic Healthcare Tell Us?

The trends we've noticed at Sonic Healthcare are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 66% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On Sonic Healthcare's ROCE

To sum it up, Sonic Healthcare has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 82% to shareholders over the last five years, it's fair to say investors are beginning to recognize 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 Sonic Healthcare, you might be interested to know about the 1 warning sign that our analysis has discovered.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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