We're Watching These Trends At Health Italia (BIT:HI)

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Health Italia (BIT:HI), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Health Italia is:

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

0.012 = €583k ÷ (€64m - €17m) (Based on the trailing twelve months to June 2020).

So, Health Italia has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 7.0%.

Check out our latest analysis for Health Italia

Historical performance is a great place to start when researching a stock so above you can see the gauge for Health Italia's ROCE against it's prior returns. If you'd like to look at how Health Italia has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Health Italia doesn't inspire confidence. Over the last four years, returns on capital have decreased to 1.2% from 31% four years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Health Italia has decreased its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Health Italia's ROCE

To conclude, we've found that Health Italia is reinvesting in the business, but returns have been falling. Since the stock has declined 60% over the last three years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we found 3 warning signs for Health Italia (2 shouldn't be ignored) you should be aware of.

While Health Italia 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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