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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. And in light of that, the trends we're seeing at Fisher & Paykel Healthcare's (NZSE:FPH) look very promising so lets take a look.
Understanding 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. To calculate this metric for Fisher & Paykel Healthcare, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.43 = NZ$712m ÷ (NZ$2.1b - NZ$428m) (Based on the trailing twelve months to March 2021).
Thus, Fisher & Paykel Healthcare has an ROCE of 43%. In absolute terms that's a great return and it's even better than the Medical Equipment industry average of 11%.
Above you can see how the current ROCE for Fisher & Paykel Healthcare compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Fisher & Paykel Healthcare here for free.
So How Is Fisher & Paykel Healthcare's ROCE Trending?
The trends we've noticed at Fisher & Paykel Healthcare are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 43%. Basically the business is earning more per dollar of capital invested and in addition to that, 167% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
What We Can Learn From Fisher & Paykel Healthcare's ROCE
All in all, it's terrific to see that Fisher & Paykel Healthcare is reaping the rewards from prior investments and is growing its capital base. And a remarkable 228% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
On a final note, we've found 1 warning sign for Fisher & Paykel Healthcare that we think you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
This article by Simply Wall St is general in nature. 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.
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