If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Although, when we looked at Sonic Healthcare (ASX:SHL), it didn't seem to tick all of these boxes.

What Is 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. The formula for this calculation on Sonic Healthcare is:

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

0.069 = AU$806m ÷ (AU$14b - AU$2.2b) (Based on the trailing twelve months to December 2023).

Therefore, Sonic Healthcare has an ROCE of 6.9%. On its own, that's a low figure but it's around the 6.4% average generated by the Healthcare industry.

View our latest analysis for Sonic Healthcare

In the above chart we have measured Sonic Healthcare's 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 Sonic Healthcare for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Sonic Healthcare doesn't inspire confidence. Around five years ago the returns on capital were 8.9%, but since then they've fallen to 6.9%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Sonic Healthcare's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 35% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with Sonic Healthcare and understanding them should be part of your investment process.