What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Patterson Companies (NASDAQ:PDCO) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Patterson Companies:

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

0.16 = US$286m ÷ (US$2.9b - US$1.1b) (Based on the trailing twelve months to October 2023).

Therefore, Patterson Companies has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 10.0% generated by the Healthcare industry.

View our latest analysis for Patterson Companies

Above you can see how the current ROCE for Patterson Companies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Patterson Companies .

So How Is Patterson Companies' ROCE Trending?

Patterson Companies has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 133%. The company is now earning US$0.2 per dollar of capital employed. In regards to capital employed, Patterson Companies appears to been achieving more with less, since the business is using 27% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 40% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.