If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Speaking of which, we noticed some great changes in Acadia Healthcare Company’s (NASDAQ:ACHC) returns on capital, so let’s have a look.
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. Analysts use this formula to calculate it for Acadia Healthcare Company:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.10 = US$473m ÷ (US$5.2b – US$432m) (Based on the trailing twelve months to June 2023).
So, Acadia Healthcare Company has an ROCE of 10%. That’s a pretty standard return and it’s in line with the industry average of 9.5%.
Above you can see how the current ROCE for Acadia Healthcare Company compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
Acadia Healthcare Company has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 39%. That’s not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 23% less than it was five years ago, which can be indicative of a business that’s improving its efficiency. If this trend continues, the business might be getting more efficient but it’s shrinking in terms of total assets.
The Bottom Line On Acadia Healthcare Company’s ROCE
In a nutshell, we’re pleased to see that Acadia Healthcare Company has been able to generate higher returns from less capital. Since the stock has returned a solid 83% to shareholders over the last five years, it’s fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a separate note, we’ve found 1 warning sign for Acadia Healthcare Company you’ll probably want to know about.
While Acadia Healthcare Company 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.
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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.