If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Hologic’s (NASDAQ:HOLX) returns on capital, so let’s have a look.
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. Analysts use this formula to calculate it for Hologic:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.23 = $1.9b ÷ ($9.4b – $1.0b) (Based on the trailing twelve months to June 2022).
SW, Hologic has an ROCE of 23%. In absolute terms that’s a great return and it’s even better than the Medical Equipment industry average of 9.2%.
See our latest analysis for Hologic
Above you can see how the current ROCE for Hologic compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
We like the trends that we’re seeing from Hologic. The data shows that returns on capital have increased substantially over the last five years to 23%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 33%. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, a combination that’s common among multi-baggers.
One more thing to note, Hologic has decreased current liabilities to 11% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business’ underlying economics, which is great to see.
All in all, it’s terrific to see that Hologic is reaping the rewards from prior investments and is growing its capital base. And with a respectable 76% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. 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.
One more thing, we’ve spotted 1 warning sign Facing Hologic that you might find interesting.
High returns are a key ingredient to strong performance, so check out our free list of stocks 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.
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