Be Wary Of Fisher & Paykel Healthcare (NZSE:FPH) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Fisher & Paykel Healthcare (NZSE:FPH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Fisher & Paykel Healthcare is:

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

0.19 = NZ$330m ÷ (NZ$2.1b - NZ$369m) (Based on the trailing twelve months to September 2022).

Therefore, Fisher & Paykel Healthcare has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 11% it's much better.

Check out our latest analysis for Fisher & Paykel Healthcare

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.

SWOT Analysis for Fisher & Paykel Healthcare

So How Is Fisher & Paykel Healthcare's ROCE Trending?

When we looked at the ROCE trend at Fisher & Paykel Healthcare, we didn't gain much confidence. To be more specific, ROCE has fallen from 31% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Fisher & Paykel Healthcare's ROCE

In summary, we're somewhat concerned by Fisher & Paykel Healthcare's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 136% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 1 warning sign facing Fisher & Paykel Healthcare that you might find interesting.

While Fisher & Paykel Healthcare isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 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.