Capital Allocation Trends At AirSculpt Technologies (NASDAQ:AIRS) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at AirSculpt Technologies (NASDAQ:AIRS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 AirSculpt Technologies:

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

0.0069 = US$1.4m ÷ (US$219m - US$17m) (Based on the trailing twelve months to June 2022).

So, AirSculpt Technologies has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 10%.

Check out the opportunities and risks within the US Healthcare industry.

Above you can see how the current ROCE for AirSculpt Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for AirSculpt Technologies.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at AirSculpt Technologies, we didn't gain much confidence. Over the last two years, returns on capital have decreased to 0.7% from 3.2% two years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From AirSculpt Technologies' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that AirSculpt Technologies is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 55% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a separate note, we've found 1 warning sign for AirSculpt Technologies you'll probably want to know about.

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.