Returns On Capital At Ramsay Health Care (ASX:RHC) Paint A Concerning Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Ramsay Health Care (ASX:RHC) and its ROCE trend, we weren't exactly thrilled.

What Is 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. Analysts use this formula to calculate it for Ramsay Health Care:

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

0.056 = AU$939m ÷ (AU$21b - AU$4.2b) (Based on the trailing twelve months to June 2024).

So, Ramsay Health Care has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 7.9%.

Check out our latest analysis for Ramsay Health Care

In the above chart we have measured Ramsay Health Care's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Ramsay Health Care .

So How Is Ramsay Health Care's ROCE Trending?

On the surface, the trend of ROCE at Ramsay Health Care doesn't inspire confidence. To be more specific, ROCE has fallen from 11% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Ramsay Health Care's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Ramsay Health Care. These growth trends haven't led to growth returns though, since the stock has fallen 43% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing to note, we've identified 1 warning sign with Ramsay Health Care and understanding this should be part of your investment process.

While Ramsay Health Care 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. 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.