A Look Into Fisher & Paykel Healthcare's (NZSE:FPH) Impressive Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Ergo, when we looked at the ROCE trends at Fisher & Paykel Healthcare (NZSE:FPH), we liked what we saw.

What Is 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 Fisher & Paykel Healthcare:

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

0.28 = NZ$506m ÷ (NZ$2.1b - NZ$304m) (Based on the trailing twelve months to March 2022).

So, Fisher & Paykel Healthcare has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Medical Equipment industry average of 11%.

View our latest analysis for Fisher & Paykel Healthcare

roce

In the above chart we have measured Fisher & Paykel Healthcare's 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 Fisher & Paykel Healthcare here for free.

What The Trend Of ROCE Can Tell Us

It's hard not to be impressed by Fisher & Paykel Healthcare's returns on capital. The company has consistently earned 28% for the last five years, and the capital employed within the business has risen 146% in that time. Now considering ROCE is an attractive 28%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Fisher & Paykel Healthcare can keep this up, we'd be very optimistic about its future.

What We Can Learn From Fisher & Paykel Healthcare's ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

While Fisher & Paykel Healthcare looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether FPH is currently trading for a fair price.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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