If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Abbott Laboratories' (NYSE:ABT) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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 Abbott Laboratories, this is the formula:

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

0.12 = US$7.3b ÷ (US$73b - US$14b) (Based on the trailing twelve months to June 2024).

Thus, Abbott Laboratories has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 8.8% it's much better.

See our latest analysis for Abbott Laboratories

In the above chart we have measured Abbott Laboratories' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Abbott Laboratories .

What Can We Tell From Abbott Laboratories' ROCE Trend?

Abbott Laboratories is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 66% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In Conclusion...

In summary, we're delighted to see that Abbott Laboratories has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 50% return over the last five years. In light of that, we think it's worth looking further into this stock because if Abbott Laboratories can keep these trends up, it could have a bright future ahead.

While Abbott Laboratories looks impressive, no company is worth an infinite price. The intrinsic value infographic for ABT helps visualize whether it is currently trading for a fair price.

While Abbott Laboratories 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.