If we are to find multi-bagger potential, there are often underlying trends that can provide clues. A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in connection with growth quantity capital employed. Basically, it means that a business has profitable initiatives that it can keep reinvesting in, which is a hallmark of a dialing machine. So when we looked at the ROCE trend of Fisher & Paykel Health (NZSE: FPH) we really liked what we saw.
Understanding Return on Capital Employed (ROCE)
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Fisher & Paykel Healthcare, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.41 = NZ $ 706 million ÷ (NZ $ 2.0 billion – NZ $ 314 million) (Based on the last twelve months up to September 2021).
Therefore, Fisher & Paykel Healthcare has a ROCE of 41%. In absolute terms, that’s a great return and it’s even better than the medical equipment industry average of 15%.
Check out our latest review for Fisher & Paykel Healthcare
In the graph above, we measured Fisher & Paykel Healthcare’s past ROCE against its past performance, but arguably the future is more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Fisher & Paykel Healthcare.
What the ROCE trend can tell us
Fisher & Paykel Healthcare shows positive trends. Over the past five years, returns on capital employed have increased substantially to 41%. The amount of capital employed also increased by 157%. This may indicate that there are many opportunities to invest capital internally and at increasingly higher rates, a common combination among multi-baggers.
A business that increases its returns on capital and can constantly reinvest in itself is a highly desirable trait, and that is what Fisher & Paykel Healthcare has. With the stock fetching a staggering 318% to shareholders over the past five years, it looks like investors are recognizing these changes. That being said, we still believe that promising fundamentals mean the company deserves additional due diligence.
On the other side of ROCE, we must consider valuation. This is why we have a FREE estimate of intrinsic value on our platform it is definitely worth checking out.
If you’d like to see other companies driving high returns, check out our free List of high yielding companies with strong balance sheets here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.