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Capital Allocation Trends At Fisher & Paykel Healthcare (NZSE:FPH) Aren’t Ideal

Capital Allocation Trends At Fisher & Paykel Healthcare (NZSE:FPH) Aren’t Ideal


If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Fisher & Paykel Healthcare (NZSE:FPH) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.

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. To calculate this metric for Fisher & Paykel Healthcare, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.19 = NZ$353m ÷ (NZ$2.3b – NZ$385m) (Based on the trailing twelve months to March 2024).

Thus, Fisher & Paykel Healthcare has an ROCE of 19%. In absolute terms, that’s a satisfactory return, but compared to the Medical Equipment industry average of 10% it’s much better.

View our latest analysis for Fisher & Paykel Healthcare

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In the above chart we have measured Fisher & Paykel Healthcare’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering Fisher & Paykel Healthcare for free.

What Does the ROCE Trend For Fisher & Paykel Healthcare Tell Us?

When we looked at the ROCE trend at Fisher & Paykel Healthcare, we didn’t gain much confidence. To be more specific, ROCE has fallen from 31% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Fisher & Paykel Healthcare. And the stock has done incredibly well with a 101% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to continue researching Fisher & Paykel Healthcare, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Fisher & Paykel Healthcare may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com



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