- United States
- Healthcare Services
R1 RCM (NASDAQ:RCM) Might Have The Makings Of A Multi-Bagger
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So when we looked at R1 RCM (NASDAQ:RCM) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on R1 RCM is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.037 = US$179m ÷ (US$5.1b - US$350m) (Based on the trailing twelve months to December 2022).
Thus, R1 RCM has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 9.4%.
Check out our latest analysis for R1 RCM
In the above chart we have measured R1 RCM's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is R1 RCM's ROCE Trending?
R1 RCM has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 3.7% on its capital. In addition to that, R1 RCM is employing 1,846% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
On a related note, the company's ratio of current liabilities to total assets has decreased to 6.8%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that R1 RCM has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
What We Can Learn From R1 RCM's ROCE
Overall, R1 RCM gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 84% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing to note, we've identified 1 warning sign with R1 RCM and understanding it should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
Valuation is complex, but we're helping make it simple.
Find out whether R1 RCM is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
R1 RCM Inc. provides technology-driven solutions that transform the patient experience and financial performance of hospitals, health systems, and physician groups.
Reasonable growth potential and fair value.