U.S. Physical Therapy (NYSE:USPH) Will Be Hoping To Turn Its Returns On Capital Around
To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. 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 U.S. Physical Therapy (NYSE:USPH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on U.S. Physical Therapy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = US$69m ÷ (US$1.0b - US$82m) (Based on the trailing twelve months to September 2023).
Thus, U.S. Physical Therapy has an ROCE of 7.4%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 9.9%.
Check out our latest analysis for U.S. Physical Therapy
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 to see what analysts are forecasting going forward, you should check out our free report for U.S. Physical Therapy.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at U.S. Physical Therapy, we didn't gain much confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 7.4%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by U.S. Physical Therapy's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last five years has been flat. 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.
One more thing, we've spotted 4 warning signs facing U.S. Physical Therapy that you might find interesting.
While U.S. Physical Therapy 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 free list 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.
