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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Although, when we looked at U.S. Physical Therapy (NYSE:USPH), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for U.S. Physical Therapy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.076 = US$69m ÷ (US$1.0b - US$115m) (Based on the trailing twelve months to September 2024).
Therefore, U.S. Physical Therapy has an ROCE of 7.6%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 10%.
View our latest analysis for U.S. Physical Therapy
In the above chart we have measured U.S. Physical Therapy's 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 analyst report for U.S. Physical Therapy .
The Trend Of ROCE
On the surface, the trend of ROCE at U.S. Physical Therapy doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 7.6%. However it looks like U.S. Physical Therapy might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From U.S. Physical Therapy's ROCE
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. Since the stock has declined 18% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think U.S. Physical Therapy has the makings of a multi-bagger.
One more thing to note, we've identified 4 warning signs with U.S. Physical Therapy and understanding them should be part of your investment process.