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

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Fisher & Paykel Healthcare (NZSE:FPH), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

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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. To calculate this metric for Fisher & Paykel Healthcare, this is the formula:

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

0.25 = NZ$510m ÷ (NZ$2.6b - NZ$500m) (Based on the trailing twelve months to March 2025).

Therefore, Fisher & Paykel Healthcare has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Medical Equipment industry average of 11%.

See our latest analysis for Fisher & Paykel Healthcare

In the above chart we have measured Fisher & Paykel Healthcare'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 analyst report for Fisher & Paykel Healthcare .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Fisher & Paykel Healthcare doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 34%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Fisher & Paykel Healthcare. These trends are starting to be recognized by investors since the stock has delivered a 18% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you're still interested in Fisher & Paykel Healthcare it's worth checking out our FREE intrinsic value approximation for FPH to see if it's trading at an attractive price in other respects.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.