There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at AMN Healthcare Services (NYSE:AMN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What is it?
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 AMN Healthcare Services is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.093 = US$185m ÷ (US$2.4b - US$385m) (Based on the trailing twelve months to June 2020).
Thus, AMN Healthcare Services has an ROCE of 9.3%. In absolute terms, that's a low return but it's around the Healthcare industry average of 9.6%.
Above you can see how the current ROCE for AMN Healthcare Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for AMN Healthcare Services.
So How Is AMN Healthcare Services' ROCE Trending?
On the surface, the trend of ROCE at AMN Healthcare Services doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 9.3%. 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.On a side note, AMN Healthcare Services has done well to pay down its current liabilities to 16% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Bottom Line On AMN Healthcare Services' ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for AMN Healthcare Services. And the stock has followed suit returning a meaningful 53% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
One more thing to note, we've identified 2 warning signs with AMN Healthcare Services and understanding them should be part of your investment process.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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