Advanced Health's (JSE:AVL) Returns On Capital Are Heading Higher

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Advanced Health (JSE:AVL) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Advanced Health is:

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

0.066 = R60m ÷ (R1.1b - R179m) (Based on the trailing twelve months to June 2022).

So, Advanced Health has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 17%.

View our latest analysis for Advanced Health

Historical performance is a great place to start when researching a stock so above you can see the gauge for Advanced Health's ROCE against it's prior returns. If you'd like to look at how Advanced Health has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The fact that Advanced Health is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 6.6% on its capital. And unsurprisingly, like most companies trying to break into the black, Advanced Health is utilizing 148% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line

Long story short, we're delighted to see that Advanced Health's reinvestment activities have paid off and the company is now profitable. Given the stock has declined 41% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to know some of the risks facing Advanced Health we've found 3 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

While Advanced Health 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.