If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Fisher & Paykel Healthcare (NZSE:FPH) looks attractive right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Fisher & Paykel Healthcare:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.34 = NZ$379m ÷ (NZ$1.4b - NZ$335m) (Based on the trailing twelve months to March 2020).
Thus, Fisher & Paykel Healthcare has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Medical Equipment industry average of 13%.
Above you can see how the current ROCE for Fisher & Paykel Healthcare compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Fisher & Paykel Healthcare here for free.
What Does the ROCE Trend For Fisher & Paykel Healthcare Tell Us?
We'd be pretty happy with returns on capital like Fisher & Paykel Healthcare. Over the past five years, ROCE has remained relatively flat at around 34% and the business has deployed 99% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.
The Bottom Line On Fisher & Paykel Healthcare's ROCE
Fisher & Paykel Healthcare has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has done incredibly well with a 434% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
Fisher & Paykel Healthcare does have some risks though, and we've spotted 1 warning sign for Fisher & Paykel Healthcare that you might be interested in.
Fisher & Paykel Healthcare is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
This article by Simply Wall St is general in nature. 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.
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