We're Watching These Trends At Garofalo Health Care (BIT:GHC)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Garofalo Health Care (BIT:GHC), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Garofalo Health Care:

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

0.043 = €15m ÷ (€423m - €81m) (Based on the trailing twelve months to June 2020).

Thus, Garofalo Health Care has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 7.0%.

See our latest analysis for Garofalo Health Care

Above you can see how the current ROCE for Garofalo Health Care compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Garofalo Health Care.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Garofalo Health Care doesn't inspire confidence. Over the last four years, returns on capital have decreased to 4.3% from 9.9% four years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Garofalo Health Care's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Garofalo Health Care. However, total returns to shareholders over the last year have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Garofalo Health Care does have some risks though, and we've spotted 3 warning signs for Garofalo Health Care that you might be interested in.

While Garofalo Health Care may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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