What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So on that note, Allscripts Healthcare Solutions (NASDAQ:MDRX) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Allscripts Healthcare Solutions, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.05 = US$72m ÷ (US$1.7b – US$253m) (Based on the trailing twelve months to September 2022).
Thus, Allscripts Healthcare Solutions has an ROCE of 5.0%. In absolute terms, that’s a low return and it also under-performs the Healthcare Services industry average of 7.5%.
Our analysis indicates that MDRX is potentially undervalued!
Above you can see how the current ROCE for Allscripts Healthcare Solutions compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Allscripts Healthcare Solutions here for free.
How Are Returns Trending?
You’d find it hard not to be impressed with the ROCE trend at Allscripts Healthcare Solutions. We found that the returns on capital employed over the last five years have risen by 118%. That’s not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Allscripts Healthcare Solutions appears to been achieving more with less, since the business is using 55% less capital to run its operation. If this trend continues, the business might be getting more efficient but it’s shrinking in terms of total assets.
From what we’ve seen above, Allscripts Healthcare Solutions has managed to increase it’s returns on capital all the while reducing it’s capital base. Considering the stock has delivered 32% to its stockholders over the last five years, it may be fair to think that investors aren’t fully aware of the promising trends yet. Given that, we’d look further into this stock in case it has more traits that could make it multiply in the long term.
On a separate note, we’ve found 2 warning signs for Allscripts Healthcare Solutions you’ll probably want to know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
What are the risks and opportunities for Allscripts Healthcare Solutions?
Trading at 51.4% below our estimate of its fair value
Earnings are forecast to grow 29.79% per year
Became profitable this year
Significant insider selling over the past 3 months
Large one-off items impacting financial results
View all Risks and Rewards
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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.