Returns At HealthStream (NASDAQ:HSTM) Appear To Be Weighed Down

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at HealthStream (NASDAQ:HSTM) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for HealthStream:

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

0.046 = US$18m ÷ (US$500m - US$119m) (Based on the trailing twelve months to December 2020).

Thus, HealthStream has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Healthcare Services industry average of 7.3%.

Check out our latest analysis for HealthStream

In the above chart we have measured HealthStream'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 HealthStream.

The Trend Of ROCE

In terms of HealthStream's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 4.6% and the business has deployed 31% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

As we've seen above, HealthStream's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 0.5% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing: We've identified 2 warning signs with HealthStream (at least 1 which is significant) , and understanding these would certainly be useful.

While HealthStream 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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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.
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