Returns Are Gaining Momentum At Laboratory Corporation of America Holdings (NYSE:LH)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Laboratory Corporation of America Holdings (NYSE:LH) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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 Laboratory Corporation of America Holdings, this is the formula:

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

0.12 = US$2.1b ÷ (US$20b - US$3.1b) (Based on the trailing twelve months to December 2022).

So, Laboratory Corporation of America Holdings has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 9.6% it's much better.

View our latest analysis for Laboratory Corporation of America Holdings

Above you can see how the current ROCE for Laboratory Corporation of America Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Laboratory Corporation of America Holdings here for free.

So How Is Laboratory Corporation of America Holdings' ROCE Trending?

Laboratory Corporation of America Holdings' ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 31% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Key Takeaway

To bring it all together, Laboratory Corporation of America Holdings has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 38% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you want to continue researching Laboratory Corporation of America Holdings, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Laboratory Corporation of America Holdings 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. 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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