Aveanna Healthcare Holdings (NASDAQ:AVAH) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at Aveanna Healthcare Holdings (NASDAQ:AVAH) 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. To calculate this metric for Aveanna Healthcare Holdings, this is the formula:

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

0.048 = US$96m ÷ (US$2.4b - US$368m) (Based on the trailing twelve months to April 2022).

So, Aveanna Healthcare Holdings has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 10%.

Check out our latest analysis for Aveanna Healthcare Holdings

In the above chart we have measured Aveanna Healthcare Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Aveanna Healthcare Holdings.

So How Is Aveanna Healthcare Holdings' ROCE Trending?

In terms of Aveanna Healthcare Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 6.1% over the last three years. However it looks like Aveanna Healthcare Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Aveanna Healthcare Holdings' ROCE

To conclude, we've found that Aveanna Healthcare Holdings is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 80% over the last year, it appears investors are expecting the worst. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

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

While Aveanna Healthcare Holdings 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.