What are the early trends we should look for to identify a stock that could 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Fisher & Paykel Healthcare (NZSE:FPH) 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)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.17 = NZ$358m ÷ (NZ$2.4b - NZ$287m) (Based on the trailing twelve months to September 2023).

Therefore, Fisher & Paykel Healthcare has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 9.7% it's much better.

See our latest analysis for Fisher & Paykel Healthcare  NZSE:FPH Return on Capital Employed January 21st 2024

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.

What Can We Tell From Fisher & Paykel Healthcare's ROCE Trend?

On the surface, the trend of ROCE at Fisher & Paykel Healthcare doesn't inspire confidence. Over the last five years, returns on capital have decreased to 17% from 36% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.



Our Take On Fisher & Paykel Healthcare's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Fisher & Paykel Healthcare. Furthermore the stock has climbed 89% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you're still interested in Fisher & Paykel Healthcare it's worth checking out our  FREE intrinsic value approximation  to see if it's trading at an attractive price in other respects.

While Fisher & Paykel Healthcare 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 freelist 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.