Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Aveanna Healthcare Holdings (NASDAQ:AVAH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Aveanna Healthcare Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = US$77m ÷ (US$1.7b - US$356m) (Based on the trailing twelve months to July 2023).
Thus, Aveanna Healthcare Holdings has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 9.8%.
Check out our latest analysis for Aveanna Healthcare Holdings
Above you can see how the current ROCE for Aveanna Healthcare Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Aveanna Healthcare Holdings here for free.
What The Trend Of ROCE Can Tell Us
There hasn't been much to report for Aveanna Healthcare Holdings' returns and its level of capital employed because both metrics have been steady for the past four years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Aveanna Healthcare Holdings to be a multi-bagger going forward.
Our Take On Aveanna Healthcare Holdings' ROCE
We can conclude that in regards to Aveanna Healthcare Holdings' returns on capital employed and the trends, there isn't much change to report on. Although the market must be expecting these trends to improve because the stock has gained 21% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you'd like to know more about Aveanna Healthcare Holdings, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.
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.