Select Medical Holdings (NYSE:SEM) Has More To Do To Multiply In Value Going Forward

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Select Medical Holdings (NYSE:SEM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Select Medical Holdings:

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

0.065 = US$423m ÷ (US$7.7b - US$1.2b) (Based on the trailing twelve months to March 2023).

Therefore, Select Medical Holdings has an ROCE of 6.5%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 9.5%.

View our latest analysis for Select Medical Holdings

In the above chart we have measured Select Medical Holdings' 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.

What Can We Tell From Select Medical Holdings' ROCE Trend?

There are better returns on capital out there than what we're seeing at Select Medical Holdings. Over the past five years, ROCE has remained relatively flat at around 6.5% and the business has deployed 22% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Select Medical Holdings' ROCE

In summary, Select Medical Holdings has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 61% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 4 warning signs with Select Medical Holdings (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

While Select Medical Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.