There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Veradigm (NASDAQ:MDRX) 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. Analysts use this formula to calculate it for Veradigm:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = US$72m ÷ (US$1.7b - US$253m) (Based on the trailing twelve months to September 2022).
Thus, Veradigm has an ROCE of 5.0%. Even though it's in line with the industry average of 5.0%, it's still a low return by itself.
In the above chart we have measured Veradigm's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Veradigm .
What Does the ROCE Trend For Veradigm Tell Us?
Veradigm has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 116%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Veradigm appears to been achieving more with less, since the business is using 55% less capital to run its operation. Veradigm 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 On Veradigm's ROCE
In summary, it's great to see that Veradigm has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 26% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you'd like to know more about Veradigm, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.
While Veradigm may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.