There are a few key trends to look for if we are to identify the next multi-bagger. In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. This shows us that it is a composing machine, capable of continually reinvesting its profits in the business and generating higher returns. So when we looked Acadia Healthcare Company (NASDAQ: ACHC) and its trend for ROCE, we really liked what we saw.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. Analysts use this formula to calculate it for Acadia Healthcare Company:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.085 = $ 352 million ÷ ($ 4.5 billion – $ 411 million) (Based on the last twelve months up to March 2021).
So, Acadia Healthcare Company has a ROCE of 8.5%. In absolute terms, this is a low return and it is also below the 11% health sector average.
Check out our latest review for Acadia Healthcare Company
Above you can see how Acadia Healthcare Company’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you like, you can view analyst forecasts covering Acadia Healthcare Company here for free.
What can we say about the ROCE trend at Acadia Healthcare Company?
Acadia Healthcare Company did not disappoint when it comes to ROCE growth. Data shows that returns on capital have increased 51% over the past five years. This is a very favorable trend because it means that the company is earning more per dollar of capital employed. Interestingly, the company can become more efficient because it uses 35% less capital than it was five years ago. A business that shrinks its asset base like this isn’t usually typical of a multi-bagger business soon.
In summary, it’s great to see that Acadia Healthcare Company has been able to turn things around and earn higher returns on lower amounts of capital. Investors may not yet be impressed with the favorable underlying trends, as over the past five years, the stock has only returned 4.5% to shareholders. So, exploring more about this stock might uncover a good opportunity, if the valuation and the other metrics stack up.
One more thing: we have identified 2 warning signs with Acadia Healthcare Company (at least 1 that cannot be ignored), and understanding them would definitely be helpful.
If you want to look for strong businesses with significant income, check out this free list of companies with good balance sheets and impressive returns on equity.
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