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. So on that note, Meilleure Health International Industry Group (HKG:2327) looks quite promising in regards to its trends of return on capital.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Meilleure Health International Industry Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = HK$41m ÷ (HK$1.7b - HK$184m) (Based on the trailing twelve months to June 2020).
Therefore, Meilleure Health International Industry Group has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 5.2%.
Above you can see how the current ROCE for Meilleure Health International Industry Group 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 Meilleure Health International Industry Group here for free.
What The Trend Of ROCE Can Tell Us
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 2.8%. The amount of capital employed has increased too, by 377%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.On a related note, the company's ratio of current liabilities to total assets has decreased to 11%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Meilleure Health International Industry Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
Our Take On Meilleure Health International Industry Group's ROCE
All in all, it's terrific to see that Meilleure Health International Industry Group is reaping the rewards from prior investments and is growing its capital base. And with a respectable 61% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you want to continue researching Meilleure Health International Industry Group, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Meilleure Health International Industry 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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