# Does Georgia Healthcare Group PLC (LON:GHG)’s Capital Return Make The Cut?

Georgia Healthcare Group stock represents an ownership share in the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. To understand Georgia Healthcare Group’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

### What is Return on Capital Employed (ROCE)?

Choosing to invest in Georgia Healthcare Group comes at the cost of investing in another potentially favourable company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Georgia Healthcare Group is good at growing investor capital. Take a look at the formula box beneath:

ROCE Calculation for GHG

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = GEL53m ÷ (GEL1.2b – GEL108m) = 8.5%

GHG’s 8.5% ROCE means that for every £100 you invest, the company creates £8.5. This makes Georgia Healthcare Group unattractive when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital will be able to compound over time, but not to the extent investors should be aiming for.

### What is causing this?

Georgia Healthcare Group’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Georgia Healthcare Group is in an adverse position, but this can change if these factors improve. Because of this, it is important to look beyond the final value of GHG’s ROCE and understand what is happening to the individual components. Looking at the past 3 year period shows us that GHG boosted investor return on capital employed from 6.2%. Over the same period, EBT went from GEL13m to GEL53m and the amount of capital employed also grew but by a proportionally lesser volume, which suggests the larger ROCE is due to a growth in earnings relative to capital requirements.

### Next Steps

ROCE for GHG investors is below the desired level at the moment, however, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation to determine whether there is potential for return by focusing our attention elsewhere. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.

1. Future Outlook: What are well-informed industry analysts predicting for GHG’s future growth? Take a look at our free research report of analyst consensus for GHG’s outlook.
2. Valuation: What is GHG worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether GHG is currently undervalued by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.