Investors Could Be Concerned With Ryman Healthcare's (NZSE:RYM) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Ryman Healthcare (NZSE:RYM) and its ROCE trend, we weren't exactly thrilled.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Ryman Healthcare is:

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

0.0033 = NZ$28m ÷ (NZ$9.2b - NZ$751m) (Based on the trailing twelve months to March 2021).

Thus, Ryman Healthcare has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 0.7%.

View our latest analysis for Ryman Healthcare

In the above chart we have measured Ryman Healthcare'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 Ryman Healthcare.

What Can We Tell From Ryman Healthcare's ROCE Trend?

When we looked at the ROCE trend at Ryman Healthcare, we didn't gain much confidence. Around five years ago the returns on capital were 1.2%, but since then they've fallen to 0.3%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Ryman Healthcare's ROCE

Bringing it all together, while we're somewhat encouraged by Ryman Healthcare's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 88% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing: We've identified 3 warning signs with Ryman Healthcare (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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