There are a few key trends to look for if we are to identify the next multi-bagger. Ideally, a business will display two trends; first growth return on capital employed (ROCE) and on the other hand, an increase amount capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. Having said that, from a first glance at Addus HomeCare (NASDAQ: ADUS) We don’t jump out of our chairs to see how the returns move, but take a closer look.
Understanding Return on Capital Employed (ROCE)
For those unsure of what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. The formula for this calculation on Addus HomeCare is:
Return on capital employed = Earnings before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.071 = $ 54 million Ã· ($ 878 million – $ 118 million) (Based on the last twelve months up to March 2021).
Therefore, Addus HomeCare has a ROCE of 7.1%. In the end, that’s a low return and underperforming the healthcare industry average by 11%.
See our latest review for Addus HomeCare
You can see above how Addus HomeCare’s current ROCE compares to its past returns on capital, but you can’t say more about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Addus HomeCare.
What the ROCE trend can tell us
When it comes to Addus HomeCare’s historic ROCE moves, the trend isn’t great. To be more precise, ROCE has increased from 9.7% over the past five years. However, as both capital employed and income have increased, it appears the company is currently continuing to grow, driven by short-term returns. And if the capital increase generates additional returns, the company, and therefore shareholders, will benefit in the long run.
Our ROCE analysis of Addus HomeCare
Even though returns on capital have fallen in the short term, we find promise that both income and capital employed have increased for Addus HomeCare. And long-term investors should be optimistic about the future, as the stock has returned a whopping 391% to shareholders over the past five years. So while investors seem to recognize these promising trends, we would take a closer look at this stock to make sure the other metrics justify the positive view.
One more thing to note, we have identified 2 warning signs with Addus HomeCare and understanding them should be part of your investment process.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
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