Perfect Medical Health Management (HKG:1830) Is Reinvesting To Multiply In Value

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Ergo, when we looked at the ROCE trends at Perfect Medical Health Management (HKG:1830), we liked what we saw.

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. To calculate this metric for Perfect Medical Health Management, this is the formula:

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

0.36 = HK$299m ÷ (HK$1.4b - HK$558m) (Based on the trailing twelve months to September 2022).

Thus, Perfect Medical Health Management has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Consumer Services industry average of 8.3%.

View our latest analysis for Perfect Medical Health Management

In the above chart we have measured Perfect Medical Health Management'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 Perfect Medical Health Management here for free.

SWOT Analysis for Perfect Medical Health Management

What The Trend Of ROCE Can Tell Us

In terms of Perfect Medical Health Management's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 36% and the business has deployed 82% more capital into its operations. Now considering ROCE is an attractive 36%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a side note, Perfect Medical Health Management's current liabilities are still rather high at 40% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Perfect Medical Health Management's ROCE

Perfect Medical Health Management has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has done incredibly well with a 237% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing, we've spotted 1 warning sign facing Perfect Medical Health Management that you might find interesting.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.