Can Austco Healthcare (ASX:AHC) Continue To Grow Its Returns On Capital?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Austco Healthcare (ASX:AHC) so let's look a bit deeper.

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. The formula for this calculation on Austco Healthcare is:

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

0.04 = AU$674k ÷ (AU$24m - AU$6.8m) (Based on the trailing twelve months to December 2020).

Thus, Austco Healthcare has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.8%.

Check out our latest analysis for Austco Healthcare

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Austco Healthcare, check out these free graphs here.

How Are Returns Trending?

We're delighted to see that Austco Healthcare is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.0%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Bottom Line

In summary, we're delighted to see that Austco Healthcare has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Considering the stock has delivered 16% 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. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Austco Healthcare does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

While Austco Healthcare may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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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