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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. 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 Alcon's (VTX:ALC) returns on capital, so let's have a look.
What Is 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 Alcon, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = US$835m ÷ (US$29b - US$2.6b) (Based on the trailing twelve months to March 2023).
Therefore, Alcon has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 14%.
Check out our latest analysis for Alcon
Above you can see how the current ROCE for Alcon compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
While there are companies with higher returns on capital out there, we still find the trend at Alcon promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 516% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line
In summary, we're delighted to see that Alcon has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 33% awarded to those who held the stock over the last three years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Alcon can keep these trends up, it could have a bright future ahead.
On a final note, we've found 1 warning sign for Alcon that we think you should be aware of.