CorVel (NASDAQ:CRVL) Is Investing Its Capital With Increasing Efficiency

What trends should we look for it we want to identify stocks that can 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at CorVel's (NASDAQ:CRVL) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for CorVel:

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

0.39 = US$89m ÷ (US$418m - US$188m) (Based on the trailing twelve months to June 2023).

Therefore, CorVel has an ROCE of 39%. In absolute terms that's a great return and it's even better than the Healthcare industry average of 9.7%.

Check out our latest analysis for CorVel

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating CorVel's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For CorVel Tell Us?

The trends we've noticed at CorVel are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 39%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 23%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that CorVel has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On CorVel's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what CorVel has. Since the stock has returned a staggering 273% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

CorVel does have some risks though, and we've spotted 1 warning sign for CorVel that you might be interested in.

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.