Beauty Farm Medical and Health Industry (HKG:2373) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Beauty Farm Medical and Health Industry (HKG:2373), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Beauty Farm Medical and Health Industry is:

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

0.23 = CN¥254m ÷ (CN¥3.1b - CN¥2.0b) (Based on the trailing twelve months to June 2023).

Thus, Beauty Farm Medical and Health Industry has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

Check out our latest analysis for Beauty Farm Medical and Health Industry

In the above chart we have measured Beauty Farm Medical and Health Industry'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 Beauty Farm Medical and Health Industry .

The Trend Of ROCE

In terms of Beauty Farm Medical and Health Industry's historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, three years ago it was 40%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Beauty Farm Medical and Health Industry has done well to pay down its current liabilities to 64% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On Beauty Farm Medical and Health Industry's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Beauty Farm Medical and Health Industry. These growth trends haven't led to growth returns though, since the stock has fallen 49% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

While Beauty Farm Medical and Health Industry doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 2373 on our platform.

Beauty Farm Medical and Health Industry is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

Have 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.