JD Health International (HKG:6618) Could Be Struggling To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 JD Health International (HKG:6618), it didn't seem to tick all of these boxes.

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What Is 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. The formula for this calculation on JD Health International is:

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

0.021 = CN¥1.2b ÷ (CN¥71b - CN¥16b) (Based on the trailing twelve months to December 2024).

So, JD Health International has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 9.4%.

See our latest analysis for JD Health International

In the above chart we have measured JD Health International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for JD Health International .

What The Trend Of ROCE Can Tell Us

In terms of JD Health International's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.1% from 6.1% five years ago. 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.

The Key Takeaway

To conclude, we've found that JD Health International is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 34% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

JD Health International could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 6618 on our platform quite valuable.

While JD Health International 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.