Returns On Capital Are Showing Encouraging Signs At Alibaba Health Information Technology (HKG:241)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at Alibaba Health Information Technology (HKG:241) so let's look a bit deeper.

Understanding 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. To calculate this metric for Alibaba Health Information Technology, this is the formula:

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

0.015 = CN¥247m ÷ (CN¥21b - CN¥5.2b) (Based on the trailing twelve months to September 2023).

Therefore, Alibaba Health Information Technology has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 9.4%.

View our latest analysis for Alibaba Health Information Technology

In the above chart we have measured Alibaba Health Information Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

Alibaba Health Information Technology has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 1.5% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Alibaba Health Information Technology is utilizing 514% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 24%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Alibaba Health Information Technology has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

To the delight of most shareholders, Alibaba Health Information Technology has now broken into profitability. And since the stock has fallen 31% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

While Alibaba Health Information Technology 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.