EMIS Group's (LON:EMIS) Returns Have Hit A Wall

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So when we looked at EMIS Group (LON:EMIS), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

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. Analysts use this formula to calculate it for EMIS Group:

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

0.27 = UK£35m ÷ (UK£193m - UK£63m) (Based on the trailing twelve months to December 2020).

Thus, EMIS Group has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Healthcare Services industry average of 10%.

Check out our latest analysis for EMIS Group

In the above chart we have measured EMIS Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for EMIS Group.

The Trend Of ROCE

Over the past five years, EMIS Group's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So while the current operations are delivering respectable returns, unless capital employed increases we'd be hard-pressed to believe it's a multi-bagger going forward. On top of that you'll notice that EMIS Group has been paying out a large portion (61%) of earnings in the form of dividends to shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

In Conclusion...

In summary, EMIS Group isn't compounding its earnings but is generating decent returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 51% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

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

EMIS Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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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