The Return Trends At Advanced Health (JSE:AVL) Look Promising

By
Simply Wall St
Published
March 16, 2022
JSE:AVL
Source: Shutterstock

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. 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.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Advanced Health, this is the formula:

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

0.12 = R92m ÷ (R926m - R184m) (Based on the trailing twelve months to June 2021).

Therefore, Advanced Health has an ROCE of 12%. In isolation, that's a pretty standard return but against the Healthcare industry average of 20%, it's not as good.

See our latest analysis for Advanced Health

roce
JSE:AVL Return on Capital Employed March 16th 2022

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Advanced Health, check out these free graphs here.

What Does the ROCE Trend For Advanced Health Tell Us?

The fact that Advanced Health is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 12% on its capital. In addition to that, Advanced Health is employing 108% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Our Take On Advanced Health's ROCE

Overall, Advanced Health gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. However the stock is down a substantial 72% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you'd like to know more about Advanced Health, we've spotted 4 warning signs, and 2 of them shouldn't be ignored.

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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