Advertisement
U.S. markets close in 4 hours 34 minutes
  • S&P 500

    5,254.64
    +6.15 (+0.12%)
     
  • Dow 30

    39,760.41
    +0.33 (+0.00%)
     
  • Nasdaq

    16,402.69
    +3.16 (+0.02%)
     
  • Russell 2000

    2,125.83
    +11.48 (+0.54%)
     
  • Crude Oil

    82.54
    +1.19 (+1.46%)
     
  • Gold

    2,234.30
    +21.60 (+0.98%)
     
  • Silver

    24.99
    +0.24 (+0.96%)
     
  • EUR/USD

    1.0805
    -0.0025 (-0.23%)
     
  • 10-Yr Bond

    4.1930
    -0.0030 (-0.07%)
     
  • GBP/USD

    1.2638
    -0.0000 (-0.00%)
     
  • USD/JPY

    151.2270
    -0.0190 (-0.01%)
     
  • Bitcoin USD

    71,326.41
    +1,989.46 (+2.87%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,972.66
    +40.68 (+0.51%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

There Are Reasons To Feel Uneasy About U.S. Physical Therapy's (NYSE:USPH) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at U.S. Physical Therapy (NYSE:USPH), it didn't seem to tick all of these boxes.

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 U.S. Physical Therapy, this is the formula:

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

0.11 = US$56m ÷ (US$594m - US$93m) (Based on the trailing twelve months to December 2020).

Therefore, U.S. Physical Therapy has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.

Check out our latest analysis for U.S. Physical Therapy

roce
roce

Above you can see how the current ROCE for U.S. Physical Therapy 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 U.S. Physical Therapy here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at U.S. Physical Therapy doesn't inspire confidence. Over the last five years, returns on capital have decreased to 11% from 17% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From U.S. Physical Therapy's ROCE

We're a bit apprehensive about U.S. Physical Therapy because despite more capital being deployed in the business, returns on that capital and sales have both fallen. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 157%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know about the risks facing U.S. Physical Therapy, we've discovered 1 warning sign that you should be aware of.

While U.S. Physical Therapy isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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

Advertisement