Returns Are Gaining Momentum At Life Time Group Holdings (NYSE:LTH)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Speaking of which, we noticed some great changes in Life Time Group Holdings' (NYSE:LTH) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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)

0.042 = US$265m ÷ (US$6.9b - US$523m) (Based on the trailing twelve months to September 2023).

Thus, Life Time Group Holdings has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.2%.

Check out 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.

How Are Returns Trending?

Shareholders will be relieved that Life Time Group Holdings has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 4.2% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. 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.

What We Can Learn From Life Time Group Holdings' ROCE

In summary, we're delighted to see that Life Time Group Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 22% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about Life Time Group Holdings, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

While Life Time Group Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.