Here's What's Concerning About Life Healthcare Group Holdings' (JSE:LHC) 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Life Healthcare Group Holdings (JSE:LHC), it didn't seem to tick all of these boxes.

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 Life Healthcare Group Holdings, this is the formula:

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

0.078 = R2.9b ÷ (R44b - R7.8b) (Based on the trailing twelve months to March 2023).

So, Life Healthcare Group Holdings has an ROCE of 7.8%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 14%.

View our latest analysis for Life Healthcare Group Holdings

In the above chart we have measured Life Healthcare Group Holdings' 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 Life Healthcare Group Holdings here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Life Healthcare Group Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.8% from 13% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Life Healthcare Group Holdings' ROCE

In summary, Life Healthcare Group Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last five years has been flat. 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.

If you want to continue researching Life Healthcare Group Holdings, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Life Healthcare Group 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.