There Are Reasons To Feel Uneasy About RHÖN-KLINIKUM's (ETR:RHK) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 RHÖN-KLINIKUM (ETR:RHK) and its ROCE trend, we weren't exactly thrilled.

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 RHÖN-KLINIKUM, this is the formula:

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

0.025 = €35m ÷ (€1.7b - €315m) (Based on the trailing twelve months to March 2023).

So, RHÖN-KLINIKUM has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 5.5%.

Check out our latest analysis for RHÖN-KLINIKUM

Historical performance is a great place to start when researching a stock so above you can see the gauge for RHÖN-KLINIKUM's ROCE against it's prior returns. If you'd like to look at how RHÖN-KLINIKUM 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?

On the surface, the trend of ROCE at RHÖN-KLINIKUM doesn't inspire confidence. Around five years ago the returns on capital were 4.0%, but since then they've fallen to 2.5%. However it looks like RHÖN-KLINIKUM might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On RHÖN-KLINIKUM's ROCE

To conclude, we've found that RHÖN-KLINIKUM is reinvesting in the business, but returns have been falling. Since the stock has declined 45% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing RHÖN-KLINIKUM, we've discovered 1 warning sign that you should be aware of.

While RHÖN-KLINIKUM 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.