Life Healthcare Group Holdings (JSE:LHC) Is Reinvesting At Lower Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Life Healthcare Group Holdings (JSE:LHC), it didn't seem to tick all of these boxes.

Understanding 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. 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)

0.059 = R1.7b ÷ (R39b - R9.1b) (Based on the trailing twelve months to March 2021).

So, Life Healthcare Group Holdings has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 17%.

Check out 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Life Healthcare Group Holdings' ROCE Trending?

In terms of Life Healthcare Group Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.9% from 27% five years ago. However it looks like Life Healthcare Group Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Life Healthcare Group Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Life Healthcare Group Holdings' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 22% in the last five years. Therefore based on the analysis done in this article, we don't think Life Healthcare Group Holdings has the makings of a multi-bagger.

Life Healthcare Group Holdings does have some risks though, and we've spotted 1 warning sign for Life Healthcare Group Holdings that you might be interested in.

While Life Healthcare Group Holdings 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.
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