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Mon. 1 Nov 2021, 11:55am ETBenzinga
In: Earnings

According to Benzinga Pro data McKesson (NYSE:MCK) posted a 57.74% decrease in earnings from Q4. Sales, however, increased by 5.97% over the previous quarter to $62.67 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 $1.34 billion and sales of $59.14 billion in Q4.

Why Is ROCE Significant?

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 Q1, McKesson posted an ROCE of -14.95%.

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 a powerful metric for comparing the effectiveness of capital allocation for 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, ultimately, earnings per share (EPS) growth.

For McKesson, a negative ROCE ratio of -14.95% suggests that management may not be effectively allocating their capital.Effective capital allocation is a positive indicator that a company will achieve more durable success and favorable long-term returns; poor capital allocation can be a leech on the performance of a company over time.

Upcoming Earnings Estimate

McKesson reported Q1 earnings per share at $5.56/share, which beat analyst predictions of $4.17/share.