Be Wary Of Modern Healthcare Technology Holdings (HKG:919) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Modern Healthcare Technology Holdings (HKG:919) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Modern Healthcare Technology Holdings:

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

0.054 = HK$15m ÷ (HK$640m - HK$361m) (Based on the trailing twelve months to September 2021).

Thus, Modern Healthcare Technology Holdings has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 9.9%.

Check out our latest analysis for Modern Healthcare Technology Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Modern Healthcare Technology Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Modern Healthcare Technology Holdings, check out these free graphs here.

What Can We Tell From Modern Healthcare Technology Holdings' ROCE Trend?

When we looked at the ROCE trend at Modern Healthcare Technology Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 27% over the last five years. However it looks like Modern Healthcare Technology Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

On a side note, Modern Healthcare Technology Holdings has done well to pay down its current liabilities to 56% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 56% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line

In summary, Modern Healthcare Technology Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 60% over the last five years, investors may not be too optimistic on this trend improving either. 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.

One more thing to note, we've identified 4 warning signs with Modern Healthcare Technology Holdings and understanding them should be part of your investment process.

While Modern Healthcare Technology Holdings 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.