Returns On Capital At Varex Imaging (NASDAQ:VREX) Paint A Concerning Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Varex Imaging (NASDAQ:VREX), it didn't seem to tick all of these boxes.

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 Varex Imaging is:

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

0.077 = US$75m ÷ (US$1.1b - US$167m) (Based on the trailing twelve months to October 2021).

Therefore, Varex Imaging has an ROCE of 7.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.2%.

View our latest analysis for Varex Imaging

In the above chart we have measured Varex Imaging's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Varex Imaging's ROCE Trend?

When we looked at the ROCE trend at Varex Imaging, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.7% from 20% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Varex Imaging is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 38% to shareholders over the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you want to continue researching Varex Imaging, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Varex Imaging 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.