Investors Will Want Life Time Group Holdings' (NYSE:LTH) Growth In ROCE To Persist
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Life Time Group Holdings (NYSE:LTH) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
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. The formula for this calculation on Life Time Group Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.042 = US$265m ÷ (US$6.9b - US$523m) (Based on the trailing twelve months to September 2023).
So, Life Time Group Holdings has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.6%.
View our latest analysis for Life Time Group Holdings
In the above chart we have measured Life Time Group Holdings' 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 analyst report for Life Time Group Holdings .
So How Is Life Time Group Holdings' ROCE Trending?
Life Time Group Holdings has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 4.2% on its capital. While returns have increased, the amount of capital employed by Life Time Group Holdings has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Bottom Line On Life Time Group Holdings' ROCE
As discussed above, Life Time Group Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And since the stock has fallen 30% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
On a final note, we found 2 warning signs for Life Time Group Holdings (1 is potentially serious) you should be aware of.
While Life Time Group Holdings 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.
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.
