Universal Health Services (NYSE:UHS) Could Be Struggling To Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Having said that, from a first glance at Universal Health Services (NYSE:UHS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Universal Health Services:

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

0.092 = US$1.1b ÷ (US$13b - US$1.9b) (Based on the trailing twelve months to December 2022).

Therefore, Universal Health Services has an ROCE of 9.2%. Even though it's in line with the industry average of 9.4%, it's still a low return by itself.

Check out our latest analysis for Universal Health Services

In the above chart we have measured Universal Health Services' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Universal Health Services here for free.

SWOT Analysis for Universal Health Services

The Trend Of ROCE

On the surface, the trend of ROCE at Universal Health Services doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 9.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Universal Health Services' ROCE

Bringing it all together, while we're somewhat encouraged by Universal Health Services' reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 9.0% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know about the risks facing Universal Health Services, we've discovered 3 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.