Returns On Capital Signal Tricky Times Ahead For RadNet (NASDAQ:RDNT)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think RadNet (NASDAQ:RDNT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for RadNet:

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

0.04 = US$113m ÷ (US$3.3b - US$480m) (Based on the trailing twelve months to December 2024).

Therefore, RadNet has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 10%.

View our latest analysis for RadNet

Above you can see how the current ROCE for RadNet compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for RadNet .

What Does the ROCE Trend For RadNet Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 5.6% five years ago, while capital employed has grown 113%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. RadNet 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.

The Bottom Line On RadNet's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that RadNet is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 382% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

Like most companies, RadNet does come with some risks, and we've found 2 warning signs that you should be aware of.

While RadNet may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.