What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Veradigm (NASDAQ:MDRX) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
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. The formula for this calculation on Veradigm is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = US$72m ÷ (US$1.7b - US$253m) (Based on the trailing twelve months to September 2022).
So, Veradigm has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Healthcare Services industry average of 6.6%.
See our latest analysis for Veradigm
NasdaqGS:MDRX Return on Capital Employed January 30th 2023
Above you can see how the current ROCE for Veradigm 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 Veradigm here for free.
The Trend Of ROCE
We're pretty happy with how the ROCE has been trending at Veradigm. The data shows that returns on capital have increased by 116% over the trailing five years. The company is now earning US$0.05 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 55% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
The Key Takeaway
From what we've seen above, Veradigm has managed to increase it's returns on capital all the while reducing it's capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 25% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
Like most companies, Veradigm does come with some risks, and we've found 2 warning signs that you should be aware of.
While Veradigm isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. 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.
