Investors Could Be Concerned With Aier Eye Hospital Group's (SZSE:300015) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Aier Eye Hospital Group (SZSE:300015) and its ROCE trend, we weren't exactly thrilled.

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 Aier Eye Hospital Group:

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

0.18 = CN¥4.9b ÷ (CN¥33b - CN¥6.7b) (Based on the trailing twelve months to September 2024).

Thus, Aier Eye Hospital Group has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Healthcare industry.

View our latest analysis for Aier Eye Hospital Group

In the above chart we have measured Aier Eye Hospital Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Aier Eye Hospital Group for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Aier Eye Hospital Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 29% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Aier Eye Hospital Group has done well to pay down its current liabilities to 20% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

To conclude, we've found that Aier Eye Hospital Group is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 6.1% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Aier Eye Hospital Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

While Aier Eye Hospital Group 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.