IDEXX Laboratories (NASDAQ:IDXX) Knows How To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over IDEXX Laboratories' (NASDAQ:IDXX) trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for IDEXX Laboratories, this is the formula:

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

0.47 = US$1.1b ÷ (US$3.4b - US$957m) (Based on the trailing twelve months to March 2024).

So, IDEXX Laboratories has an ROCE of 47%. In absolute terms that's a great return and it's even better than the Medical Equipment industry average of 10%.

View our latest analysis for IDEXX Laboratories

Above you can see how the current ROCE for IDEXX Laboratories compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for IDEXX Laboratories .

So How Is IDEXX Laboratories' ROCE Trending?

We'd be pretty happy with returns on capital like IDEXX Laboratories. Over the past five years, ROCE has remained relatively flat at around 47% and the business has deployed 142% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If IDEXX Laboratories can keep this up, we'd be very optimistic about its future.

On a side note, IDEXX Laboratories has done well to reduce current liabilities to 29% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On IDEXX Laboratories' ROCE

In short, we'd argue IDEXX Laboratories has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has followed suit returning a meaningful 95% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

While IDEXX Laboratories looks impressive, no company is worth an infinite price. The intrinsic value infographic for IDXX helps visualize whether it is currently trading for a fair price.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.