Dr. Lal PathLabs (NSE:LALPATHLAB) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Dr. Lal PathLabs (NSE:LALPATHLAB), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Dr. Lal PathLabs:

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

0.19 = ₹3.5b ÷ (₹23b - ₹4.5b) (Based on the trailing twelve months to December 2022).

Therefore, Dr. Lal PathLabs has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 14% it's much better.

See our latest analysis for Dr. Lal PathLabs

Above you can see how the current ROCE for Dr. Lal PathLabs 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 Dr. Lal PathLabs here for free.

What Can We Tell From Dr. Lal PathLabs' ROCE Trend?

On the surface, the trend of ROCE at Dr. Lal PathLabs doesn't inspire confidence. Around five years ago the returns on capital were 32%, but since then they've fallen to 19%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Dr. Lal PathLabs' ROCE

To conclude, we've found that Dr. Lal PathLabs is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 122% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing, we've spotted 3 warning signs facing Dr. Lal PathLabs that you might find interesting.

While Dr. Lal PathLabs isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.