June 22, 2024

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Investors Could Be Concerned With Green Cross Health’s (NZSE:GXH) Returns On Capital

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If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Although, when we looked at Green Cross Health (NZSE:GXH), it didn’t seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Green Cross Health, this is the formula:

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

0.14 = NZ$37m ÷ (NZ$374m – NZ$119m) (Based on the trailing twelve months to September 2021).

Thus, Green Cross Health has an ROCE of 14%. By itself that’s a normal return on capital and it’s in line with the industry’s average returns of 14%.

View our latest analysis for Green Cross Health

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While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Green Cross Health, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Green Cross Health’s historical ROCE movements, the trend isn’t fantastic. Around five years ago the returns on capital were 22%, but since then they’ve fallen to 14%. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion…

In summary, Green Cross Health is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. And in the last five years, the stock has given away 26% so the market doesn’t look too hopeful on these trends strengthening any time soon. In any case, the stock doesn’t have these traits of a multi-bagger discussed above, so if that’s what you’re looking for, we think you’d have more luck elsewhere.

One more thing: We’ve identified 2 warning signs with Green Cross Health (at least 1 which is concerning) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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