If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Austco Healthcare (ASX:AHC) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Austco Healthcare, this is the formula:

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

0.087 = AU$2.0m ÷ (AU$34m - AU$10m) (Based on the trailing twelve months to June 2022).

So, Austco Healthcare has an ROCE of 8.7%. On its own, that's a low figure but it's around the 9.8% average generated by the Medical Equipment industry.

View our latest analysis for Austco Healthcare

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 want to delve into the historical earnings, revenue and cash flow of Austco Healthcare, check out these free graphs here.

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 8.7% on its capital. And unsurprisingly, like most companies trying to break into the black, Austco Healthcare is utilizing 184% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 31%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Austco Healthcare's ROCE

Overall, Austco Healthcare gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 90% 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. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.