Capital returns at UnitedHealth Group (NYSE: UNH) stalled
Did you know that certain financial measures can provide clues about a potential multi-bagger? A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in line with growth amount capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Therefore, when we briefly examined UnitedHealth Group (NYSE: UNH) Trend ROCE, we were pretty happy with what we saw.
Understanding Return on Capital Employed (ROCE)
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for UnitedHealth Group, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.16 = US $ 21 billion ÷ (US $ 210 billion – US $ 77 billion) (Based on the last twelve months up to June 2021).
Therefore, UnitedHealth Group has a ROCE of 16%. In absolute terms, this is a satisfactory performance, but compared to the 12% average for the health sector, it is much better.
Check out our latest review for UnitedHealth Group
In the graph above, we measured UnitedHealth Group’s past ROCE against its past performance, but the future is arguably more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for UnitedHealth Group.
The ROCE trend
While the returns on capital are good, they haven’t budged much. Over the past five years, ROCE has remained relatively stable at around 16% and the company has deployed 85% additional capital in its operations. Given that 16% is moderate ROCE, it’s good to see that a company can keep reinvesting at these decent rates of return. Over long periods of time, returns like these may not be very exciting, but with consistency, they can be profitable in terms of stock price performance.
Ultimately, UnitedHealth Group has proven its ability to adequately reinvest capital at good rates of return. And the stock has performed incredibly well with a return of 226% over the past five years, so long-term investors are no doubt delighted with the result. So while the stock may be “more expensive” than it used to be, we believe that the solid fundamentals justify this stock for further research.
If you are interested in learning more about the risks UnitedHealth Group faces, we have discovered 2 warning signs that you need to be aware of.
While UnitedHealth Group doesn’t earn the highest return, check out this free list of companies that generate high returns on equity with strong balance sheets.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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