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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of UnitedHealth Group (NYSE:UNH) looks decent, right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for UnitedHealth Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$32b ÷ (US$282b - US$114b) (Based on the trailing twelve months to September 2023).
So, UnitedHealth Group has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Healthcare industry.
Check out our latest analysis for UnitedHealth Group
Above you can see how the current ROCE for UnitedHealth Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for UnitedHealth Group.
So How Is UnitedHealth Group's ROCE Trending?
While the current returns on capital are decent, they haven't changed much. The company has consistently earned 19% for the last five years, and the capital employed within the business has risen 77% in that time. 19% is a pretty standard return, and it provides some comfort knowing that UnitedHealth Group has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a side note, UnitedHealth Group's current liabilities are still rather high at 40% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
To sum it up, UnitedHealth Group has simply been reinvesting capital steadily, at those decent rates of return. On top of that, the stock has rewarded shareholders with a remarkable 121% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.