Here's What To Make Of Spire Healthcare Group's (LON:SPI) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Spire Healthcare Group (LON:SPI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Spire Healthcare Group:

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

0.031 = UK£57m ÷ (UK£2.0b - UK£174m) (Based on the trailing twelve months to June 2020).

Thus, Spire Healthcare Group has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 9.0%.

See our latest analysis for Spire Healthcare Group

In the above chart we have measured Spire Healthcare 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 Spire Healthcare Group.

What Can We Tell From Spire Healthcare Group's ROCE Trend?

On the surface, the trend of ROCE at Spire Healthcare Group doesn't inspire confidence. Around five years ago the returns on capital were 7.6%, but since then they've fallen to 3.1%. However it looks like Spire Healthcare Group 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 Spire Healthcare Group's ROCE

To conclude, we've found that Spire Healthcare Group is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 52% in the last five years. Therefore based on the analysis done in this article, we don't think Spire Healthcare Group has the makings of a multi-bagger.

On a final note, we found 2 warning signs for Spire Healthcare Group (1 is potentially serious) you should be aware of.

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. 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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