Ramsay Générale de Santé (EPA:GDS) Will Want To Turn Around Its Return Trends

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. However, after investigating Ramsay Générale de Santé (EPA:GDS), we don't think it's current trends fit the mold of a multi-bagger.

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 Ramsay Générale de Santé is:

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

0.053 = €272m ÷ (€6.7b - €1.6b) (Based on the trailing twelve months to June 2021).

So, Ramsay Générale de Santé has an ROCE of 5.3%. Even though it's in line with the industry average of 5.3%, it's still a low return by itself.

View our latest analysis for Ramsay Générale de Santé

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ramsay Générale de Santé's ROCE against it's prior returns. If you're interested in investigating Ramsay Générale de Santé's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Ramsay Générale de Santé Tell Us?

When we looked at the ROCE trend at Ramsay Générale de Santé, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.1% over the last five years. However it looks like Ramsay Générale de Santé 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 Ramsay Générale de Santé's ROCE

Bringing it all together, while we're somewhat encouraged by Ramsay Générale de Santé's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 69% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Ramsay Générale de Santé does have some risks though, and we've spotted 1 warning sign for Ramsay Générale de Santé that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
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