Investors Met With Slowing Returns on Capital At HealthStream (NASDAQ:HSTM)
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at HealthStream (NASDAQ:HSTM) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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 HealthStream, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.033 = US$13m ÷ (US$493m - US$109m) (Based on the trailing twelve months to June 2023).
So, HealthStream has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Healthcare Services industry average of 5.5%.
See our latest analysis for HealthStream
In the above chart we have measured HealthStream's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for HealthStream.
What Does the ROCE Trend For HealthStream Tell Us?
There hasn't been much to report for HealthStream's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if HealthStream doesn't end up being a multi-bagger in a few years time.
What We Can Learn From HealthStream's ROCE
We can conclude that in regards to HealthStream's returns on capital employed and the trends, there isn't much change to report on. And in the last five years, the stock has given away 23% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
If you're still interested in HealthStream it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
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.
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