Returns On Capital Are Showing Encouraging Signs At New Journey Health Technology GroupLTD (SZSE:002219)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in New Journey Health Technology GroupLTD's (SZSE:002219) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for New Journey Health Technology GroupLTD:

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

0.058 = CN¥177m ÷ (CN¥6.3b - CN¥3.3b) (Based on the trailing twelve months to June 2024).

Therefore, New Journey Health Technology GroupLTD has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 8.7%.

See our latest analysis for New Journey Health Technology GroupLTD

Historical performance is a great place to start when researching a stock so above you can see the gauge for New Journey Health Technology GroupLTD's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of New Journey Health Technology GroupLTD.

What Can We Tell From New Journey Health Technology GroupLTD's ROCE Trend?

Like most people, we're pleased that New Journey Health Technology GroupLTD is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 5.8% on their capital employed. In regards to capital employed, New Journey Health Technology GroupLTD is using 45% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. New Journey Health Technology GroupLTD could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 52% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

What We Can Learn From New Journey Health Technology GroupLTD's ROCE

In a nutshell, we're pleased to see that New Journey Health Technology GroupLTD has been able to generate higher returns from less capital. Given the stock has declined 19% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to know some of the risks facing New Journey Health Technology GroupLTD we've found 4 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While New Journey Health Technology GroupLTD 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.