Quest Diagnostics (NYSE:DGX) Hasn't Managed To Accelerate Its Returns

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Quest Diagnostics' (NYSE:DGX) ROCE trend, we were pretty happy with what we saw.

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)

0.11 = US$1.3b ÷ (US$14b - US$2.3b) (Based on the trailing twelve months to March 2024).

Thus, Quest Diagnostics has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.

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're interested, you can view the analysts predictions in our free analyst report for Quest Diagnostics .

How Are Returns Trending?

While the current returns on capital are decent, they haven't changed much. The company has employed 21% more capital in the last five years, and the returns on that capital have remained stable at 11%. 11% is a pretty standard return, and it provides some comfort knowing that Quest Diagnostics has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line On Quest Diagnostics' ROCE

To sum it up, Quest Diagnostics has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

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

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.