Ramsay Health Care (ASX:RHC) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Ramsay Health Care (ASX:RHC) and its ROCE trend, we weren't exactly thrilled.

We've discovered 3 warning signs about Ramsay Health Care. View them for free.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Ramsay Health Care, this is the formula:

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

0.056 = AU$953m ÷ (AU$21b - AU$3.7b) (Based on the trailing twelve months to December 2024).

So, Ramsay Health Care has an ROCE of 5.6%. Even though it's in line with the industry average of 6.4%, it's still a low return by itself.

View our latest analysis for Ramsay Health Care

Above you can see how the current ROCE for Ramsay Health Care compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Ramsay Health Care .

What Does the ROCE Trend For Ramsay Health Care Tell Us?

In terms of Ramsay Health Care's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.6%, but since then they've fallen to 5.6%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Ramsay Health Care's ROCE

Bringing it all together, while we're somewhat encouraged by Ramsay Health Care's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 42% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Ramsay Health Care has the makings of a multi-bagger.

Ramsay Health Care does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

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.