What Do You Get For Owning Acadia Healthcare Company Inc (NASDAQ:ACHC)?

If you purchase a ACHC share you are effectively becoming a partner with many other shareholders. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Therefore, looking at how efficiently Acadia Healthcare Company is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

ROCE: Explanation and Calculation

Choosing to invest in Acadia Healthcare Company comes at the cost of investing in another potentially favourable company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. We’ll look at Acadia Healthcare Company’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. ACHC’s ROCE is calculated below:

ROCE Calculation for ACHC

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = US\$259.14m ÷ (US\$6.50b – US\$394.12m) = 4.24%

As you can see, ACHC earned \$4.2 from every \$100 you invested over the previous twelve months. A good ROCE hurdle you should aim for in your investments is 15%, which ACHC has missed by a wide margin, meaning the company creates a poor amount of earnings from capital employed.

What is causing this?

The underperforming ROCE is not ideal for Acadia Healthcare Company investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, ACHC’s ROCE may increase, in which case your portfolio could benefit from holding the company. Because of this, it is important to look beyond the final value of ACHC’s ROCE and understand what is happening to the individual components. If you go back three years, you’ll find that ACHC’s ROCE has decreased from 4.70%. We can see that earnings have actually increased from US\$173.18m to US\$259.14m but capital employed rose by a relatively larger volume because of an increase in total assets , which means that although earnings have increased, ACHC requires more capital to produce each \$1 of earnings.

Next Steps

ACHC’s investors have experienced a downward trend in ROCE and it is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.

1. Future Outlook: What are well-informed industry analysts predicting for ACHC’s future growth? Take a look at our free research report of analyst consensus for ACHC’s outlook.
2. Valuation: What is ACHC worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether ACHC is currently undervalued by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.