Investors Will Want Austco Healthcare's (ASX:AHC) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Austco Healthcare's (ASX:AHC) returns on capital, so let's have a look.

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 Austco Healthcare, this is the formula:

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

0.10 = AU$2.1m ÷ (AU$27m - AU$7.2m) (Based on the trailing twelve months to June 2021).

Thus, Austco Healthcare has an ROCE of 10%. In isolation, that's a pretty standard return but against the Medical Equipment industry average of 15%, it's not as good.

View our latest analysis for Austco Healthcare

Historical performance is a great place to start when researching a stock so above you can see the gauge for Austco Healthcare's ROCE against it's prior returns. If you'd like to look at how Austco Healthcare has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that Austco Healthcare is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 10% on its capital. Not only that, but the company is utilizing 63% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 27%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Austco Healthcare has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Austco Healthcare's ROCE

Long story short, we're delighted to see that Austco Healthcare's reinvestment activities have paid off and the company is now profitable. And with a respectable 61% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Austco Healthcare can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 2 warning signs with Austco Healthcare and understanding these should be part of your investment process.

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.

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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.