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Return Trends At HealthStream (NASDAQ:HSTM) Aren't Appealing

·2 min read

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think HealthStream (NASDAQ:HSTM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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 HealthStream, this is the formula:

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

0.021 = US$8.3m ÷ (US$487m - US$100m) (Based on the trailing twelve months to December 2021).

Therefore, HealthStream has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Healthcare Services industry average of 7.0%.

View our latest analysis for HealthStream

roce
roce

Above you can see how the current ROCE for HealthStream 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 HealthStream here for free.

What Does the ROCE Trend For HealthStream Tell Us?

The returns on capital haven't changed much for HealthStream in recent years. The company has employed 28% more capital in the last five years, and the returns on that capital have remained stable at 2.1%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

Long story short, while HealthStream has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly then, the total return to shareholders over the last five years has been flat. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

HealthStream does have some risks though, and we've spotted 2 warning signs for HealthStream that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.