AdaptHealth's (NASDAQ:AHCO) Returns On Capital Not Reflecting Well On The Business

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think AdaptHealth (NASDAQ:AHCO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. Analysts use this formula to calculate it for AdaptHealth:

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

0.045 = US$191m ÷ (US$4.7b - US$448m) (Based on the trailing twelve months to September 2023).

Therefore, AdaptHealth has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 10%.

Check out our latest analysis for AdaptHealth

Above you can see how the current ROCE for AdaptHealth 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 AdaptHealth here for free.

The Trend Of ROCE

When we looked at the ROCE trend at AdaptHealth, we didn't gain much confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 4.5%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, AdaptHealth has decreased its current liabilities to 9.5% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by AdaptHealth's reinvestment in its own business, we're aware that returns are shrinking. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 76% over the last three years. Therefore based on the analysis done in this article, we don't think AdaptHealth has the makings of a multi-bagger.

If you're still interested in AdaptHealth it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While AdaptHealth 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.