Looking Into McKesson's Return On Capital Employed

McKesson MCK posted a 6.49% decrease in earnings from Q1. Sales, however, increased by 9.21% over the previous quarter to $60.81 billion. Despite the increase in sales this quarter, the decrease in earnings may suggest McKesson is not utilizing their capital as effectively as possible. McKesson reached earnings of $678.00 million and sales of $55.68 billion in Q1.

What Is Return On Capital Employed?

Return on Capital Employed is a measure of yearly pre-tax profit relative to capital employed by a business. Changes in earnings and sales indicate shifts in a company's ROCE. A higher ROCE is generally representative of successful growth of a company and is a sign of higher earnings per share in the future. A low or negative ROCE suggests the opposite. In Q2, McKesson posted an ROCE of 0.09%.

Keep in mind, while ROCE is a good measure of a company's recent performance, it is not a highly reliable predictor of a company's earnings or sales in the near future.

ROCE is an important metric for the comparison of similar companies. A relatively high ROCE shows McKesson 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 McKesson, 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.

Q2 Earnings Insight

McKesson reported Q2 earnings per share at $4.8/share, which beat analyst predictions of $3.87/share.