Capital Investments At Chemed (NYSE:CHE) Point To A Promising Future

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Chemed's (NYSE:CHE) ROCE trend, we were very happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Chemed, this is the formula:

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

0.29 = US$331m ÷ (US$1.4b - US$283m) (Based on the trailing twelve months to March 2023).

So, Chemed has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Healthcare industry average of 9.5%.

View our latest analysis for Chemed

Above you can see how the current ROCE for Chemed compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Chemed here for free.

What The Trend Of ROCE Can Tell Us

In terms of Chemed's history of ROCE, it's quite impressive. The company has consistently earned 29% for the last five years, and the capital employed within the business has risen 56% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Chemed can keep this up, we'd be very optimistic about its future.

What We Can Learn From Chemed's ROCE

In summary, we're delighted to see that Chemed has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 65% return if they held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 1 warning sign with Chemed and understanding it should be part of your investment process.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.