Andon Health's (SZSE:002432) Returns On Capital Are Heading Higher

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Andon Health (SZSE:002432) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Andon Health:

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

0.044 = CN¥930m ÷ (CN¥22b - CN¥1.1b) (Based on the trailing twelve months to September 2023).

So, Andon Health has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 9.2%.

View our latest analysis for Andon Health

Historical performance is a great place to start when researching a stock so above you can see the gauge for Andon Health'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 Andon Health.

What Does the ROCE Trend For Andon Health Tell Us?

We're delighted to see that Andon Health is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 4.4% on its capital. Not only that, but the company is utilizing 1,274% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 4.9%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Andon Health's ROCE

Long story short, we're delighted to see that Andon Health's reinvestment activities have paid off and the company is now profitable. And a remarkable 583% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, Andon Health does come with some risks, and we've found 4 warning signs that you should be aware of.

While Andon Health 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.