There Are Reasons To Feel Uneasy About Privia Health Group's (NASDAQ:PRVA) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Privia Health Group (NASDAQ:PRVA) 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. To calculate this metric for Privia Health Group, this is the formula:

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

0.02 = US$13m ÷ (US$1.1b - US$430m) (Based on the trailing twelve months to June 2024).

Thus, Privia Health Group has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 10%.

View our latest analysis for Privia Health Group

In the above chart we have measured Privia Health Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Privia Health Group for free.

What Does the ROCE Trend For Privia Health Group Tell Us?

When we looked at the ROCE trend at Privia Health Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.0% from 6.0% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Privia Health Group. These growth trends haven't led to growth returns though, since the stock has fallen 40% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know about the risks facing Privia Health Group, we've discovered 1 warning sign that you should be aware of.

While Privia Health Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.