Returns On Capital At Chengdu Bright Eye Hospital (SZSE:301239) Paint A Concerning Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Although, when we looked at Chengdu Bright Eye Hospital (SZSE:301239), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Chengdu Bright Eye Hospital:

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

0.073 = CN¥289m ÷ (CN¥4.9b - CN¥890m) (Based on the trailing twelve months to September 2023).

Thus, Chengdu Bright Eye Hospital has an ROCE of 7.3%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 10%.

View our latest analysis for Chengdu Bright Eye Hospital

Above you can see how the current ROCE for Chengdu Bright Eye Hospital 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 Chengdu Bright Eye Hospital for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Chengdu Bright Eye Hospital doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.3% from 12% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Chengdu Bright Eye Hospital has done well to pay down its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Chengdu Bright Eye Hospital's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Chengdu Bright Eye Hospital is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 45% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you're still interested in Chengdu Bright Eye Hospital it's worth checking out our FREE intrinsic value approximation for 301239 to see if it's trading at an attractive price in other respects.

While Chengdu Bright Eye Hospital isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.