Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Chemed (NYSE:CHE) looks attractive right now, so lets see what the trend of returns can tell us.
Understanding 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. Analysts use this formula to calculate it for Chemed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.25 = US$366m ÷ (US$1.7b – US$262m) (Based on the trailing twelve months to June 2024).
Thus, Chemed has an ROCE of 25%. That’s a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.
See our latest analysis for Chemed
Above you can see how the current ROCE for Chemed 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 Chemed for free.
How Are Returns Trending?
In terms of Chemed’s history of ROCE, it’s quite impressive. Over the past five years, ROCE has remained relatively flat at around 25% and the business has deployed 69% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that’s even better. If these trends can continue, it wouldn’t surprise us if the company became a multi-bagger.
The Bottom Line
In summary, we’re delighted to see that Chemed has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Therefore it’s no surprise that shareholders have earned a respectable 47% return if they held over the last five years. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.
On a separate note, we’ve found 1 warning sign for Chemed you’ll probably want to know about.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.