Returns On Capital At Addus HomeCare (NASDAQ:ADUS) Have Stalled

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Addus HomeCare (NASDAQ:ADUS) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Addus HomeCare is:

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

0.096 = US$78m ÷ (US$931m - US$125m) (Based on the trailing twelve months to March 2023).

Thus, Addus HomeCare has an ROCE of 9.6%. On its own, that's a low figure but it's around the 9.5% average generated by the Healthcare industry.

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'd like, you can check out the forecasts from the analysts covering Addus HomeCare here for free.

SWOT Analysis for Addus HomeCare

So How Is Addus HomeCare's ROCE Trending?

In terms of Addus HomeCare's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 9.6% and the business has deployed 264% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

As we've seen above, Addus HomeCare's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 62% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Addus HomeCare does have some risks though, and we've spotted 1 warning sign for Addus HomeCare that you might be interested in.

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.