Yahoo Finance RHÖN-KLINIKUM (ETR:RHK) May Have Issues Allocating Its Capital
If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think RHÖN-KLINIKUM (ETR:RHK) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding 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 RHÖN-KLINIKUM is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.016 = €22m ÷ (€1.7b - €325m) (Based on the trailing twelve months to June 2023).
Therefore, RHÖN-KLINIKUM has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 5.7%.
See our latest analysis for RHÖN-KLINIKUM
Historical performance is a great place to start when researching a stock so above you can see the gauge for RHÖN-KLINIKUM's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of RHÖN-KLINIKUM, check out these free graphs here.
So How Is RHÖN-KLINIKUM's ROCE Trending?
On the surface, the trend of ROCE at RHÖN-KLINIKUM doesn't inspire confidence. To be more specific, ROCE has fallen from 3.9% 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.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by RHÖN-KLINIKUM's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 48% 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.
On a final note, we've found 1 warning sign for RHÖN-KLINIKUM that we think you should be aware of.
While RHÖN-KLINIKUM 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.
