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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Acadia Healthcare Company (NASDAQ:ACHC) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Acadia Healthcare Company is:

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

0.085 = US$352m ÷ (US$4.5b - US$411m) (Based on the trailing twelve months to March 2021).

Thus, Acadia Healthcare Company has an ROCE of 8.5%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 12%.

Check out our latest analysis for Acadia Healthcare Company

Above you can see how the current ROCE for Acadia Healthcare Company compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Acadia Healthcare Company here for free.

What The Trend Of ROCE Can Tell Us

You'd find it hard not to be impressed with the ROCE trend at Acadia Healthcare Company. The data shows that returns on capital have increased by 51% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 35% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

What We Can Learn From Acadia Healthcare Company's ROCE

In the end, Acadia Healthcare Company has proven it's capital allocation skills are good with those higher returns from less amount of capital. Considering the stock has delivered 10% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Acadia Healthcare Company (of which 1 doesn't sit too well with us!) that you should know about.

While Acadia Healthcare Company 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.

This article by Simply Wall St is general in nature. 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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