InnovAge Holding (NASDAQ:INNV) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating InnovAge Holding (NASDAQ:INNV), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for InnovAge Holding, this is the formula:

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

0.04 = US$19m ÷ (US$558m - US$94m) (Based on the trailing twelve months to March 2022).

So, InnovAge Holding has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 10%.

Check out our latest analysis for InnovAge Holding

In the above chart we have measured InnovAge Holding's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

In terms of InnovAge Holding's historical ROCE movements, the trend isn't fantastic. Around two years ago the returns on capital were 15%, but since then they've fallen to 4.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From InnovAge Holding's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that InnovAge Holding is reinvesting for growth and has higher sales as a result. Despite these promising trends, the stock has collapsed 74% over the last year, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.

One more thing to note, we've identified 1 warning sign with InnovAge Holding and understanding it should be part of your investment process.

While InnovAge Holding 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.