Investors Will Want Addus HomeCare's (NASDAQ:ADUS) Growth In ROCE To Persist
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, Addus HomeCare (NASDAQ:ADUS) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Addus HomeCare is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.099 = US$88m ÷ (US$1.0b - US$140m) (Based on the trailing twelve months to September 2023).
So, Addus HomeCare has an ROCE of 9.9%. Even though it's in line with the industry average of 10%, it's still a low return by itself.
View our latest analysis for Addus HomeCare
In the above chart we have measured Addus HomeCare'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 report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.9%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 143%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
What We Can Learn From Addus HomeCare's ROCE
To sum it up, Addus HomeCare has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 40% 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. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
While Addus HomeCare looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether ADUS is currently trading for a fair price.
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.
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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.
