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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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. With that in mind, we've noticed some promising trends at Community Health Systems (NYSE:CYH) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
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 Community Health Systems, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = US$1.0b ÷ (US$15b - US$2.3b) (Based on the trailing twelve months to June 2022).
Thus, Community Health Systems has an ROCE of 8.1%. On its own, that's a low figure but it's around the 10% average generated by the Healthcare industry.
Check out our latest analysis for Community Health Systems
In the above chart we have measured Community Health Systems' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
Community Health Systems has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 53% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Community Health Systems appears to been achieving more with less, since the business is using 31% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
The Bottom Line
In a nutshell, we're pleased to see that Community Health Systems has been able to generate higher returns from less capital. And since the stock has fallen 64% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
Community Health Systems does have some risks though, and we've spotted 2 warning signs for Community Health Systems that you might be interested in.