Returns On Capital At Universal Health Services (NYSE:UHS) Have Hit The Brakes
Identifying stocks that can significantly appreciate in value over time involves several key indicators. Among these, a growing return on capital employed (ROCE) paired with an expansion in the amount of capital employed are particularly telling. Essentially, these factors indicate that a company is able to reinvest in profitable initiatives, a hallmark of a successful growth story. However, a preliminary examination of Universal Health Services (NYSE:UHS) shows a somewhat stagnant picture regarding its capital returns, prompting a more detailed analysis.
ROCE is a metric used to evaluate the efficiency with which a company allocates the capital under its control to profitable investments. The formula for computing ROCE is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
For Universal Health Services, this calculation based on the figures for the trailing twelve months up to March 2024 yields a ROCE of 11%. This figure aligns with the industry average, indicating a standard level of profitability when it comes to capital use.
The historical trajectory of Universal Health Services’ ROCE does not paint a picture of growth. Over the past five years, both the company’s ROCE and its capital employed have experienced little to no significant change. This pattern suggests that the company is not actively reinvesting in itself, possibly indicating that it has moved beyond its initial growth phase. Without renewed investment, the prospects for Universal Health Services to become a multi-bagger in the future seem slim.
Despite the static nature of its ROCE, Universal Health Services has seen its stock appreciate by 57% over the last five years. This market optimism might be based on expectations of future performance improvements. Yet, if the company continues on its current path without enhancing its return on capital or increasing its capital employed, its potential for significant long-term growth might be limited.
It’s crucial for investors to monitor these trends closely, as persistent lack of growth in ROCE and capital employed can impede a company’s ability to expand and generate higher returns. While Universal Health Services is currently not showing the robust health needed for a booming growth story, market watchers should not lose sight of potential shifts in its investment strategy that might alter its trajectory.
In conclusion, while Universal Health Services maintains a stable return on capital comparable to industry norms, its lack of growth in ROCE and stagnant capital employed over several years suggests a cautious outlook for its potential as a high-growth investment. Investors might want to keep an eye on this stock, looking for signs of strategic investments or operational improvements that could kickstart a new growth phase.
While Universal Health Services may not present the highest levels of return, investors looking for companies with strong return profiles are encouraged to explore other opportunities. For those seeking high returns on equity paired with robust financial stability, various other companies might better meet these criteria.
