Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 CorVel (NASDAQ:CRVL) looks attractive right now, so lets see what the trend of returns can tell us.
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. The formula for this calculation on CorVel is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.36 = US$85m ÷ (US$416m – US$181m) (Based on the trailing twelve months to June 2022).
Thus, CorVel has an ROCE of 36%. In absolute terms that’s a great return and it’s even better than the Healthcare industry average of 10%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for CorVel’s ROCE against it’s prior returns. If you’d like to look at how CorVel has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
CorVel deserves to be commended in regards to it’s returns. The company has consistently earned 36% for the last five years, and the capital employed within the business has risen 61% in that time. With returns that high, it’s great that the business can continually reinvest its money at such appealing rates of return. You’ll see this when looking at well operated businesses or favorable business models.
On a side note, CorVel’s current liabilities are still rather high at 44% 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
CorVel has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we’re thrilled about. And the stock has done incredibly well with a 219% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
If you want to continue researching CorVel, you might be interested to know about the 1 warning sign that our analysis has discovered.
CorVel is not the only stock earning high returns. If you’d like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
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