Chemed (NYSE:CHE) Is Investing Its Capital With Increasing Efficiency

November 26, 2021
  •  Updated
March 04, 2022
NYSE:CHE
Source: Shutterstock

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Chemed's (NYSE:CHE) look very promising so lets take a look.

What is 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 Chemed:

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

0.33 = US$343m ÷ (US$1.3b - US$286m) (Based on the trailing twelve months to September 2021).

Therefore, Chemed has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Healthcare industry average of 12%.

See our latest analysis for Chemed

roce
NYSE:CHE Return on Capital Employed November 27th 2021

In the above chart we have measured Chemed'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 Chemed.

So How Is Chemed's ROCE Trending?

The trends we've noticed at Chemed are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 33%. Basically the business is earning more per dollar of capital invested and in addition to that, 53% more capital is being employed now too. So we're very much inspired by what we're seeing at Chemed thanks to its ability to profitably reinvest capital.

The Bottom Line

All in all, it's terrific to see that Chemed is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 1 warning sign facing Chemed that you might find interesting.

Chemed is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

Valuation is complex, but we're helping make it simple.

Find out whether Chemed 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.

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