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Return On Capital Employed Overview: CVS Health

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CVS Health (NYSE: CVS) posted a 32.27% decrease in earnings from Q2. Sales, however, increased by 2.62% over the previous quarter to $67.06 billion. Despite the increase in sales this quarter, the decrease in earnings may suggest CVS Health is not utilizing their capital as effectively as possible. In Q2, CVS Health earned $4.50 billion and total sales reached $65.34 billion.

What Is Return On Capital Employed?

Changes in earnings and sales indicate shifts in CVS Health’s Return on Capital Employed, a measure of yearly pre-tax profit relative to capital employed by a business. Generally, a higher ROCE suggests successful growth of a company and is a sign of higher earnings per share in the future. In Q3, CVS Health posted an ROCE of 0.04%.

It is important to keep in mind ROCE evaluates past performance and is not used as a predictive tool. It is a good measure of a company's recent performance, but several factors could affect earnings and sales in the near future.

ROCE is an important metric for the comparison of similar companies. A relatively high ROCE shows CVS Health is potentially operating at a higher level of efficiency than other companies in its industry. If the company is generating high profits with its current level of capital, some of that money can be reinvested in more capital which will generally lead to higher returns and earnings per share growth.

For CVS Health, the return on capital employed ratio shows the number of assets can actually help the company achieve higher returns, an important note investors will take into account when gauging the payoff from long-term financing strategies.

Q3 Earnings Insight

CVS Health reported Q3 earnings per share at $1.66/share, which beat analyst predictions of $1.33/share.

 

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Posted-In: Earnings News Health Care General