FONAR (NASDAQ:FONR) Is Reinvesting At Lower Rates Of Return
What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. In light of that, when we looked at FONAR (NASDAQ:FONR) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for FONAR:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.093 = US$17m ÷ (US$202m - US$14m) (Based on the trailing twelve months to September 2023).
Therefore, FONAR has an ROCE of 9.3%. Even though it's in line with the industry average of 9.3%, it's still a low return by itself.
See our latest analysis for FONAR
Historical performance is a great place to start when researching a stock so above you can see the gauge for FONAR's ROCE against it's prior returns. If you'd like to look at how FONAR has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For FONAR Tell Us?
On the surface, the trend of ROCE at FONAR doesn't inspire confidence. To be more specific, ROCE has fallen from 19% over the last five years. However it looks like FONAR might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.
The Bottom Line
To conclude, we've found that FONAR is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think FONAR has the makings of a multi-bagger.
FONAR does have some risks though, and we've spotted 1 warning sign for FONAR that you might be interested in.
While FONAR 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.
