What underlying trends should we watch out for if we want to uncover a stock that could grow over time? First and foremost, we’ll be looking for evidence of a rising return on capital employed (ROCE), as well as an expanding base of capital employed. This usually indicates a corporation with a strong business plan and lots of potential for successful reinvestment. In light of this, we weren’t exactly delighted when we looked into U.S. Physical Therapy (NYSE:USPH) and its ROCE trend.
For those who are unsure what ROCE is, it assesses how much pre-tax profit a business can make using the capital that is invested in it. The computation for US physical therapy is as follows:
(US$1b – US$86m)/0.074 = US$68 million. (Based on the previous 12 months ending in June 2023).
The ROCE for U.S. Physical Therapy is 7.4% as a result. In the end, that’s a modest return and it falls short of the 9.5% average for the Healthcare sector.
Although we compared U.S. Physical Therapy’s past success to its past ROCE in the above chart, one could argue that the future is more crucial. You can view the free forecasts from the analysts who cover US Physical Therapy here if you’d like.
We didn’t feel very confident after looking at the ROCE trend at U.S. Physical Therapy. Returns on capital have dropped from 14% to 7.4% during the past five years. However, it appears that the company is currently seeking growth at the expense of short-term returns given that both capital used and revenue have increased. Additionally, if the added capital produces more profits over time, the company and its stockholders will gain.
We consider it encouraging that revenue and capital employed have both increased for U.S. Physical Therapy even while short-term returns on capital have decreased. The stock has dropped 14% over the past five years, despite the positive trends, so there may be a chance for savvy investors. As a result, we advise deeper investigation into this stock to learn what the company’s other fundamentals may teach us.
One more thing: you might be interested in 4 cautionary indications we found regarding U.S. Physical Therapy.
Check out this free list of reliable businesses for those who wish to invest in
Our articles are not meant to be financial advice; instead, we only offer analysis based on objective methods, historical data, and analyst forecasts. It doesn’t represent an advice to buy or sell any stock, and it doesn’t take into consideration your goals or financial position. We hope to provide you with long-term analysis that is driven by essential facts. Be aware that recent price-sensitive company announcements or high-quality information may not be taken into account in our analysis. No stock mentioned has any positions held by Simply Wall St.