The Return Trends At Community Health Systems (NYSE:CYH) Look Promising

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 on that note, Community Health Systems (NYSE:CYH) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Community Health Systems is:

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

0.069 = US$865m ÷ (US$15b - US$2.1b) (Based on the trailing twelve months to September 2023).

Thus, Community Health Systems has an ROCE of 6.9%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 9.9%.

See our latest analysis for Community Health Systems

Above you can see how the current ROCE for Community Health Systems 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 Community Health Systems.

So How Is Community Health Systems' ROCE Trending?

Community Health Systems is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 270% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

What We Can Learn From Community Health Systems' ROCE

To bring it all together, Community Health Systems has done well to increase the returns it's generating from its capital employed. Given the stock has declined 44% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing Community Health Systems we've found 3 warning signs (2 are potentially serious!) that you should be aware of before investing here.

While Community Health Systems isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.