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There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Addus HomeCare (NASDAQ:ADUS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. Analysts use this formula to calculate it for Addus HomeCare:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = US$62m ÷ (US$965m - US$128m) (Based on the trailing twelve months to June 2022).
Thus, Addus HomeCare has an ROCE of 7.4%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 10%.
Check out our latest analysis for Addus HomeCare
Above you can see how the current ROCE for Addus HomeCare 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 Addus HomeCare here for free.
The Trend Of ROCE
On the surface, the trend of ROCE at Addus HomeCare doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 7.4%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Key Takeaway
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Addus HomeCare. And the stock has done incredibly well with a 156% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
On a separate note, we've found 1 warning sign for Addus HomeCare you'll probably want to know about.
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.