Viemed Healthcare (TSE:VMD) Might Be Having Difficulty Using Its Capital Effectively
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Viemed Healthcare (TSE:VMD) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Viemed Healthcare:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.078 = US$7.9m ÷ (US$125m - US$23m) (Based on the trailing twelve months to March 2023).
So, Viemed Healthcare has an ROCE of 7.8%. On its own, that's a low figure but it's around the 6.5% average generated by the Healthcare industry.
Check out our latest analysis for Viemed Healthcare
In the above chart we have measured Viemed Healthcare's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Viemed Healthcare here for free.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Viemed Healthcare, we didn't gain much confidence. To be more specific, ROCE has fallen from 31% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, Viemed Healthcare has done well to pay down its current liabilities to 19% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that Viemed Healthcare is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 122% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.
If you'd like to know about the risks facing Viemed Healthcare, we've discovered 1 warning sign that you should be aware of.
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.
