What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after briefly looking over the numbers, we don't think National HealthCare (NYSEMKT:NHC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. The formula for this calculation on National HealthCare is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = US$32m ÷ (US$1.4b - US$281m) (Based on the trailing twelve months to December 2020).
Therefore, National HealthCare has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 11%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how National HealthCare has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
In terms of National HealthCare's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.9% from 7.8% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From National HealthCare's ROCE
Bringing it all together, while we're somewhat encouraged by National HealthCare's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 38% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
On a final note, we found 3 warning signs for National HealthCare (1 is significant) you should be aware of.
While National HealthCare 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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