GE HealthCare Technologies (NASDAQ:GEHC) May Have Issues Allocating Its Capital

0

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don’t think GE HealthCare Technologies (NASDAQ:GEHC) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for GE HealthCare Technologies, this is the formula:

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

0.12 = US$2.9b ÷ (US$32b – US$7.6b) (Based on the trailing twelve months to September 2023).

Therefore, GE HealthCare Technologies has an ROCE of 12%. In absolute terms, that’s a satisfactory return, but compared to the Medical Equipment industry average of 9.3% it’s much better.

View our latest analysis for GE HealthCare Technologies

roce
NasdaqGS:GEHC Return on Capital Employed January 5th 2024

Above you can see how the current ROCE for GE HealthCare Technologies 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 GE HealthCare Technologies.

What Can We Tell From GE HealthCare Technologies’ ROCE Trend?

When we looked at the ROCE trend at GE HealthCare Technologies, we didn’t gain much confidence. Over the last two years, returns on capital have decreased to 12% from 15% two years ago. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

Bringing it all together, while we’re somewhat encouraged by GE HealthCare Technologies’ reinvestment in its own business, we’re aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 30% over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn’t high.

On a final note, we’ve found 1 warning sign for GE HealthCare Technologies that we think you should be aware of.

While GE HealthCare Technologies 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.

Valuation is complex, but we’re helping make it simple.

Find out whether GE HealthCare Technologies is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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.

link

Leave a Reply

Your email address will not be published. Required fields are marked *