Some Investors May Be Worried About FONAR's (NASDAQ:FONR) Returns On Capital
If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating FONAR (NASDAQ:FONR), we don't think it's current trends fit the mold of a multi-bagger.
What Is 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 FONAR, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.089 = US$16m ÷ (US$199m - US$14m) (Based on the trailing twelve months to March 2023).
Therefore, FONAR has an ROCE of 8.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.1%.
View 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 Can We Tell From FONAR's ROCE Trend?
On the surface, the trend of ROCE at FONAR doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.9% from 20% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On FONAR's ROCE
Bringing it all together, while we're somewhat encouraged by FONAR's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 39% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
If you want to continue researching FONAR, you might be interested to know about the 1 warning sign that our analysis has discovered.
While FONAR isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
