There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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 Patterson Companies' (NASDAQ:PDCO) returns on capital, so let's have a look.
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. To calculate this metric for Patterson Companies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$289m ÷ (US$2.9b - US$1.1b) (Based on the trailing twelve months to July 2023).
Therefore, Patterson Companies has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 9.7% it's much better.
Check out our latest analysis for Patterson Companies
In the above chart we have measured Patterson Companies' 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 Patterson Companies here for free.
What The Trend Of ROCE Can Tell Us
Patterson Companies has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 95% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 24% less capital than it was five years ago. Patterson Companies may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Bottom Line
In summary, it's great to see that Patterson Companies has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has returned a solid 60% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you'd like to know more about Patterson Companies, we've spotted 3 warning signs, and 2 of them can't be ignored.
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.
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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.