Investors Met With Slowing Returns on Capital At Quest Diagnostics (NYSE:DGX)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Quest Diagnostics (NYSE:DGX), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Quest Diagnostics:

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

0.096 = US$1.3b ÷ (US$16b - US$2.1b) (Based on the trailing twelve months to September 2024).

So, Quest Diagnostics has an ROCE of 9.6%. Even though it's in line with the industry average of 10%, it's still a low return by itself.

View our latest analysis for Quest Diagnostics

In the above chart we have measured Quest Diagnostics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Quest Diagnostics for free.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Quest Diagnostics. Over the past five years, ROCE has remained relatively flat at around 9.6% and the business has deployed 40% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

Long story short, while Quest Diagnostics has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 71% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 1 warning sign with Quest Diagnostics and understanding it should be part of your investment process.

While Quest Diagnostics 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.