Returns On Capital At Ryman Healthcare (NZSE:RYM) Paint An Interesting Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Ryman Healthcare (NZSE:RYM), it didn't seem to tick all of these boxes.

What is 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. To calculate this metric for Ryman Healthcare, this is the formula:

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

0.0051 = NZ$41m ÷ (NZ$8.3b - NZ$234m) (Based on the trailing twelve months to September 2020).

Thus, Ryman Healthcare has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 7.5%.

See our latest analysis for Ryman Healthcare

In the above chart we have measured Ryman Healthcare's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Ryman Healthcare here for free.

What Can We Tell From Ryman Healthcare's ROCE Trend?

In terms of Ryman Healthcare's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.5% from 1.1% five years ago. However it looks like Ryman Healthcare might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Ryman Healthcare's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 106% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we found 2 warning signs for Ryman Healthcare (1 shouldn't be ignored) you should be aware of.

While Ryman Healthcare may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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