Capital Allocation Trends At Healthcare Services Group (NASDAQ:HCSG) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 Healthcare Services Group (NASDAQ:HCSG), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Healthcare Services Group, this is the formula:

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

0.071 = US$40m ÷ (US$747m - US$174m) (Based on the trailing twelve months to March 2022).

So, Healthcare Services Group has an ROCE of 7.1%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 8.5%.

View our latest analysis for Healthcare Services Group

Above you can see how the current ROCE for Healthcare Services Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Healthcare Services Group here for free.

So How Is Healthcare Services Group's ROCE Trending?

On the surface, the trend of ROCE at Healthcare Services Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.1% from 27% five years ago. However it looks like Healthcare Services Group 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Healthcare Services Group's ROCE

To conclude, we've found that Healthcare Services Group is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 58% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing: We've identified 2 warning signs with Healthcare Services Group (at least 1 which is a bit concerning) , and understanding these 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.

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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.