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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. With that in mind, we’ve noticed some promising trends at Quest Diagnostics (NYSE:DGX) so let’s look a bit deeper.
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. To calculate this metric for Quest Diagnostics, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.17 = US$2.1b ÷ (US$14b – US$1.8b) (Based on the trailing twelve months to December 2020).
So, Quest Diagnostics has an ROCE of 17%. On its own, that’s a standard return, however it’s much better than the 11% generated by the Healthcare industry.
See 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 report on analyst forecasts for the company.
The Trend Of ROCE
Quest Diagnostics is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 39% more capital is being employed now too. So we’re very much inspired by what we’re seeing at Quest Diagnostics thanks to its ability to profitably reinvest capital.
Our Take On Quest Diagnostics’ ROCE
All in all, it’s terrific to see that Quest Diagnostics is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 85% to shareholders over the last five years, it’s fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.
Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 2 warning signs for Quest Diagnostics (of which 1 shouldn’t be ignored!) that you should know about.
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. 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.
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