Slowing Rates Of Return At Ramsay Générale de Santé (EPA:GDS) Leave Little Room For Excitement

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Although, when we looked at Ramsay Générale de Santé (EPA:GDS), it didn't seem to tick all of these boxes.

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. 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)

0.074 = €393m ÷ (€6.8b - €1.5b) (Based on the trailing twelve months to June 2022).

Therefore, Ramsay Générale de Santé has an ROCE of 7.4%. On its own, that's a low figure but it's around the 8.3% average generated by the Healthcare industry.

See 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 want to delve into the historical earnings, revenue and cash flow of Ramsay Générale de Santé, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Ramsay Générale de Santé. The company has consistently earned 7.4% for the last five years, and the capital employed within the business has risen 203% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

As we've seen above, Ramsay Générale de Santé's returns on capital haven't increased but it is reinvesting in the business. And investors may be recognizing these trends since the stock has only returned a total of 39% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Ramsay Générale de Santé does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While Ramsay Générale de Santé 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.