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Here's What To Make Of Regis Healthcare's (ASX:REG) Returns On Capital

Simply Wall St
·3 mins read

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Regis Healthcare (ASX:REG) 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?

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 Regis Healthcare, this is the formula:

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

0.093 = AU$43m ÷ (AU$1.8b - AU$1.3b) (Based on the trailing twelve months to June 2020).

So, Regis Healthcare has an ROCE of 9.3%. On its own, that's a low figure but it's around the 7.9% average generated by the Healthcare industry.

View our latest analysis for Regis Healthcare

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In the above chart we have measured Regis Healthcare's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Regis Healthcare.

The Trend Of ROCE

When we looked at the ROCE trend at Regis Healthcare, we didn't gain much confidence. Around five years ago the returns on capital were 37%, but since then they've fallen to 9.3%. 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.

Another thing to note, Regis Healthcare has a high ratio of current liabilities to total assets of 75%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

To conclude, we've found that Regis Healthcare is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 76% over the last five years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Regis Healthcare has the makings of a multi-bagger.

Like most companies, Regis Healthcare does come with some risks, and we've found 4 warning signs that you should be aware of.

While Regis Healthcare may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

This article by Simply Wall St is general in nature. 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.

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