Capital Allocation Trends At RHÖN-KLINIKUM (ETR:RHK) Aren't Ideal

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at RHÖN-KLINIKUM (ETR:RHK) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on RHÖN-KLINIKUM is:

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

0.022 = €31m ÷ (€1.7b - €285m) (Based on the trailing twelve months to June 2022).

So, RHÖN-KLINIKUM has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 5.9%.

Check out our latest analysis for RHÖN-KLINIKUM

Above you can see how the current ROCE for RHÖN-KLINIKUM compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering RHÖN-KLINIKUM here for free.

The Trend Of ROCE

When we looked at the ROCE trend at RHÖN-KLINIKUM, we didn't gain much confidence. To be more specific, ROCE has fallen from 3.9% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On RHÖN-KLINIKUM's ROCE

Bringing it all together, while we're somewhat encouraged by RHÖN-KLINIKUM's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 46% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

RHÖN-KLINIKUM could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While RHÖN-KLINIKUM isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.