If we want to find multiple potential, there are often underlying trends that can provide clues. A common approach is to try to find a company with return on capital employed (ROCE) that are increasing, in relation to an increase amounts of capital used. If you see this, it usually means that it’s a company with a great business model and very profitable reinvestment opportunities. Although, when we looked Life Healthcare Group Holdings (JSE: LHC), didn’t seem to tick all these boxes.
Understanding return on capital employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s annual profit before tax (its return), relative to the capital employed in the business. To calculate this metric for Life Healthcare Group Holdings, this is the formula:
Return on capital employed = Earnings before interest and tax (EBIT) ÷ (Total assets – Current liabilities)
0.078 = R2.7b ÷ (R42b – R7.6b) (Based on the trailing twelve months to September 2022).
Therefore, Life Healthcare Group Holdings has a ROCE of 7.8%. Ultimately, this is a low return and underperforms the healthcare industry average of 17%.
See our latest analysis of Life Healthcare Group Holdings
Above you can see how the current ROCE for Life Healthcare Group Holdings compares to past returns on equity, but there’s only so much you can tell from the past. If you want to see what analysts predict for the future, you should check out ours free report on Life Healthcare Group Holdings.
ROCE trend
On the surface, the ROCE trend in Life Healthcare Group Holdings does not inspire confidence. To be more specific, ROCE has fallen from 14% over the past five years. Meanwhile, the business is leveraging more capital, but that hasn’t moved the needle much in terms of sales over the past 12 months, so that could reflect long-term investment. It may take some time before the company starts to see any change in profits from these investments.
On a related note, Life Healthcare Group Holdings has reduced its current liabilities to 18% of total assets. This may partly explain why ROCE has fallen. Additionally, it can reduce some aspects of business risk because now the company’s suppliers or short-term creditors are financing less of its operations. Since the business essentially funds more of its operations with its own cash, you could argue that this has made the business less efficient at generating ROCE.
After all
In summary, Life Healthcare Group Holdings is reinvesting funds back into the business for growth, but unfortunately it seems that sales haven’t picked up much yet. And investors seem skeptical that trends will pick up because the stock has fallen 31% in the past five years. In any case, the stock doesn’t have these features of a multi-bagger discussed above, so if that’s what you’re looking for, we think you’d have better luck elsewhere.
Another thing, we noticed 1 warning sign opposite Life Healthcare Group Holdings that you might find interesting.
If you want to look for stable companies with big profits, check this out free list of companies with good balance sheets and impressive returns on capital.
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This article from 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 into account your financial objectives or situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not include the latest price-sensitive company announcements or quality materials. Simply Wall St has no position in any of the stocks mentioned.
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