Physitrack (STO:PTRK) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Physitrack (STO:PTRK), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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 Physitrack is:

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

0.035 = €1.3m ÷ (€45m - €8.1m) (Based on the trailing twelve months to June 2022).

So, Physitrack has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Healthcare Services industry average of 11%.

Our analysis indicates that PTRK is potentially undervalued!

In the above chart we have measured Physitrack's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Physitrack here for free.

How Are Returns Trending?

When we looked at the ROCE trend at Physitrack, we didn't gain much confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 3.5%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Physitrack'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 Physitrack. However, despite the promising trends, the stock has fallen 55% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Physitrack does have some risks though, and we've spotted 1 warning sign for Physitrack that you might be interested in.

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. 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.