Stock Analysis

Has Green Cross Health (NZSE:GXH) Got What It Takes To Become A Multi-Bagger?

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NZSE:GXH
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Green Cross Health (NZSE:GXH), it didn't seem to tick all of these boxes.

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

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. To calculate this metric for Green Cross Health, this is the formula:

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

0.14 = NZ$36m ÷ (NZ$374m - NZ$113m) (Based on the trailing twelve months to September 2020).

Therefore, Green Cross Health has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 13% generated by the Consumer Retailing industry.

View our latest analysis for Green Cross Health

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NZSE:GXH Return on Capital Employed January 29th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Green Cross Health's ROCE against it's prior returns. If you're interested in investigating Green Cross Health's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Green Cross Health, we didn't gain much confidence. To be more specific, ROCE has fallen from 19% over the last five years. However it looks like Green Cross Health 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'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.

The Bottom Line On Green Cross Health's ROCE

Bringing it all together, while we're somewhat encouraged by Green Cross Health's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 46% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we've found 1 warning sign for Green Cross Health that we think you should be aware of.

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