Life Time Group Holdings' (NYSE:LTH) Returns On Capital Are Heading Higher

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Life Time Group Holdings (NYSE:LTH) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Life Time Group Holdings, this is the formula:

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

0.033 = US$206m ÷ (US$6.8b - US$535m) (Based on the trailing twelve months to June 2023).

So, Life Time Group Holdings has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 8.8%.

View our latest analysis for Life Time Group Holdings

In the above chart we have measured Life Time Group Holdings' 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 Life Time Group Holdings.

The Trend Of ROCE

Life Time Group Holdings has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 3.3% on its capital, because three years ago it was incurring losses. While returns have increased, the amount of capital employed by Life Time Group Holdings has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Our Take On Life Time Group Holdings' ROCE

To sum it up, Life Time Group Holdings is collecting higher returns from the same amount of capital, and that's impressive. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 12% return over the last year. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Life Time Group Holdings, we've discovered 1 warning sign that you should be aware of.

While Life Time Group Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.