To find a multi-bagger stock, what are the underlying trends we should look for in a business?  In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing.  This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns.    Ergo, when we looked at the ROCE trends at Chemed (NYSE:CHE), we liked what we saw.    

Understanding Return On Capital Employed (ROCE)

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 Chemed is:

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

0.24 = US$342m ÷ (US$1.7b - US$282m) (Based on the trailing twelve months to March 2024).

So, Chemed has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Healthcare industry average of 11%.  

NYSE:CHE Return on Capital Employed June 4th 2024

Above you can see how the current ROCE for Chemed compares to its prior returns on capital, but there's only so much you can tell from the past.  If you're interested, you can view the analysts predictions in our free analyst report for Chemed .

The Trend Of ROCE

Chemed deserves to be commended in regards to it's returns.   Over the past  five years, ROCE has remained relatively flat at around 24% and the business has deployed 70% more capital into its operations.   Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better.   You'll see this when looking at well operated businesses or favorable business models.  

What We Can Learn From Chemed's ROCE

In summary, we're delighted to see that Chemed has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger.        And since the stock has risen strongly over the last  five years, it appears the market might expect this trend to continue.   So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.    

One more thing to note, we've identified   1 warning sign with Chemed and understanding it should be part of your investment process.  

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.