Austco Healthcare (ASX:AHC) Is Looking To Continue Growing Its Returns On Capital

·3 min read

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. 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, Austco Healthcare (ASX:AHC) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Austco Healthcare is:

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

0.10 = AU$2.1m ÷ (AU$27m - AU$7.2m) (Based on the trailing twelve months to June 2021).

Thus, Austco Healthcare has an ROCE of 10%. In isolation, that's a pretty standard return but against the Medical Equipment industry average of 15%, it's not as good.

See our latest analysis for Austco Healthcare

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Historical performance is a great place to start when researching a stock so above you can see the gauge for Austco Healthcare's ROCE against it's prior returns. If you're interested in investigating Austco Healthcare's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Austco Healthcare Tell Us?

We're delighted to see that Austco Healthcare is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 10% on its capital. Not only that, but the company is utilizing 63% more capital than before, but that's to be expected from a company trying to break into profitability. 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.

One more thing to note, Austco Healthcare has decreased current liabilities to 27% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

In Conclusion...

In summary, it's great to see that Austco Healthcare has managed to break into profitability and is continuing to reinvest in its business. And with a respectable 55% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Austco Healthcare can keep these trends up, it could have a bright future ahead.

If you want to continue researching Austco Healthcare, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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