Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Life Time Group Holdings (NYSE:LTH) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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 Life Time Group Holdings:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.049 = US$331m ÷ (US$7.2b - US$457m) (Based on the trailing twelve months to September 2024).

Thus, Life Time Group Holdings has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.1%.

Check out our latest analysis for Life Time Group Holdings

Above you can see how the current ROCE for Life Time Group 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 Life Time Group Holdings for free.

How Are Returns Trending?

Shareholders will be relieved that Life Time Group Holdings has broken into profitability. The company now earns 4.9% on its capital, because four years ago it was incurring losses. 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.

Our Take On Life Time Group Holdings' ROCE

To sum it up, Life Time Group Holdings is collecting higher returns from the same amount of capital, and that's impressive. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 57% return over the last three years. In light of that, we think it's worth looking further into this stock because if Life Time Group Holdings can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for Life Time Group Holdings that we think you should be aware of.

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.