Will Eifelhöhen-Klinik's (FRA:EIF) Growth In ROCE Persist?

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. With that in mind, we've noticed some promising trends at Eifelhöhen-Klinik (FRA:EIF) so let's look a bit deeper.

What is 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 Eifelhöhen-Klinik is:

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

0.025 = €1.5m ÷ (€74m - €12m) (Based on the trailing twelve months to June 2020).

Therefore, Eifelhöhen-Klinik has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 6.9%.

See our latest analysis for Eifelhöhen-Klinik

Historical performance is a great place to start when researching a stock so above you can see the gauge for Eifelhöhen-Klinik's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Eifelhöhen-Klinik, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

The fact that Eifelhöhen-Klinik is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 2.5% which is a sight for sore eyes. Not only that, but the company is utilizing 32% 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.

One more thing to note, Eifelhöhen-Klinik has decreased current liabilities to 16% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On Eifelhöhen-Klinik's ROCE

Overall, Eifelhöhen-Klinik gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.

Eifelhöhen-Klinik does have some risks, we noticed 3 warning signs (and 2 which are concerning) we think you should know about.

While Eifelhöhen-Klinik 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. 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.
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