Narayana Hrudayalaya's (NSE:NH) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Narayana Hrudayalaya's (NSE:NH) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Narayana Hrudayalaya is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.12 = ₹2.6b ÷ (₹28b - ₹7.0b) (Based on the trailing twelve months to June 2021).

So, Narayana Hrudayalaya has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 14% generated by the Healthcare industry.

View our latest analysis for Narayana Hrudayalaya

In the above chart we have measured Narayana Hrudayalaya's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Narayana Hrudayalaya.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Narayana Hrudayalaya. The data shows that returns on capital have increased substantially over the last five years to 12%. The amount of capital employed has increased too, by 66%. So we're very much inspired by what we're seeing at Narayana Hrudayalaya thanks to its ability to profitably reinvest capital.

The Bottom Line On Narayana Hrudayalaya's ROCE

In summary, it's great to see that Narayana Hrudayalaya can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a solid 78% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing Narayana Hrudayalaya, we've discovered 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

When trading Narayana Hrudayalaya or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.