What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating EC Healthcare (HKG:2138), we don't think it's current trends fit the mold of a multi-bagger.
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. Analysts use this formula to calculate it for EC Healthcare:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = HK$132m ÷ (HK$5.5b - HK$1.6b) (Based on the trailing twelve months to September 2024).
Therefore, EC Healthcare has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 9.2%.
See our latest analysis for EC Healthcare
Historical performance is a great place to start when researching a stock so above you can see the gauge for EC Healthcare's ROCE against it's prior returns. If you're interested in investigating EC Healthcare's past further, check out this free graph covering EC Healthcare's past earnings, revenue and cash flow.
What Can We Tell From EC Healthcare's ROCE Trend?
In terms of EC Healthcare's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 28%, but since then they've fallen to 3.4%. 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.
Our Take On EC Healthcare's ROCE
In summary, EC Healthcare is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 85% over the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
On a final note, we found 3 warning signs for EC Healthcare (1 is a bit concerning) you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
Valuation is complex, but we're here to simplify it.
Discover if EC Healthcare might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
Access Free AnalysisHave feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.