If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating HealthStream (NASDAQ:HSTM), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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 HealthStream, this is the formula:

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

0.041 = US$16m ÷ (US$496m - US$106m) (Based on the trailing twelve months to June 2021).

So, HealthStream has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Healthcare Services industry average of 6.7%.

See our latest analysis for HealthStream

Above you can see how the current ROCE for HealthStream 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 HealthStream.

What Can We Tell From HealthStream's ROCE Trend?

The returns on capital haven't changed much for HealthStream in recent years. The company has employed 32% more capital in the last five years, and the returns on that capital have remained stable at 4.1%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

As we've seen above, HealthStream's returns on capital haven't increased but it is reinvesting in the business. And investors may be recognizing these trends since the stock has only returned a total of 11% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Like most companies, HealthStream does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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