Investors Will Want Addus HomeCare's (NASDAQ:ADUS) Growth In ROCE To Persist

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Addus HomeCare's (NASDAQ:ADUS) returns on capital, so let's have a look.

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. The formula for this calculation on Addus HomeCare is:

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

0.099 = US$88m ÷ (US$1.0b - US$140m) (Based on the trailing twelve months to September 2023).

Thus, Addus HomeCare has an ROCE of 9.9%. Even though it's in line with the industry average of 10.0%, it's still a low return by itself.

Check out our latest analysis for Addus HomeCare

Above you can see how the current ROCE for Addus HomeCare compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Addus HomeCare .

What Can We Tell From Addus HomeCare's ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 9.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 143% more capital is being employed now too. So we're very much inspired by what we're seeing at Addus HomeCare thanks to its ability to profitably reinvest capital.

The Key Takeaway

In summary, it's great to see that Addus HomeCare can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has only returned 34% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

While Addus HomeCare looks impressive, no company is worth an infinite price. The intrinsic value infographic for ADUS helps visualize whether it is currently trading for a fair price.

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.