Does GE HealthCare qualify as Multibagger stock?

What are the early trends we should look for to identify a stock that could 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. 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 GE HealthCare Technologies, we don’t think it’s current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for GE HealthCare Technologies, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = US$2.9b ÷ (US$32b – US$7.6b) (Based on the trailing twelve months to September 2023).

Therefore, GE HealthCare Technologies has an ROCE of 12%. In absolute terms, that’s a satisfactory return, but compared to the Medical Equipment industry average of 9.3% it’s much better.

Above you can see how the current ROCE for GE HealthCare Technologies 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 report on analyst forecasts for the company.

How are returns trending?
When we looked at the ROCE trend at GE HealthCare Technologies, we didn’t gain much confidence. Over the last two years, returns on capital have decreased to 12% from 15% two years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our take on GE HealthCare Technologies’ ROCE
To conclude, we’ve found that GE HealthCare Technologies is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 10% over the last year, investors must think there’s better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn’t high. Simply Wall St