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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Ramsay Health Care (ASX:RHC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
We've discovered 3 warning signs about Ramsay Health Care. View them for free.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Ramsay Health Care, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = AU$953m ÷ (AU$21b - AU$3.7b) (Based on the trailing twelve months to December 2024).
Therefore, Ramsay Health Care has an ROCE of 5.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.4%.
Check out our latest analysis for Ramsay Health Care
In the above chart we have measured Ramsay Health Care's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Ramsay Health Care .
The Trend Of ROCE
When we looked at the ROCE trend at Ramsay Health Care, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.6% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
What We Can Learn From Ramsay Health Care's ROCE
Bringing it all together, while we're somewhat encouraged by Ramsay Health Care's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 46% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.