Modern Healthcare Technology Holdings (HKG:919) Is Experiencing Growth In Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Modern Healthcare Technology Holdings (HKG:919) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Modern Healthcare Technology Holdings is:

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

0.044 = HK$9.7m ÷ (HK$561m - HK$343m) (Based on the trailing twelve months to March 2023).

Thus, Modern Healthcare Technology Holdings has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 8.3%.

View our latest analysis for Modern Healthcare Technology Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Modern Healthcare Technology Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Modern Healthcare Technology Holdings' ROCE Trending?

The fact that Modern Healthcare Technology Holdings is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 4.4% which is a sight for sore eyes. In addition to that, Modern Healthcare Technology Holdings is employing 146% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Modern Healthcare Technology Holdings has decreased current liabilities to 61% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

Our Take On Modern Healthcare Technology Holdings' ROCE

Overall, Modern Healthcare Technology Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 49% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Modern Healthcare Technology Holdings does have some risks though, and we've spotted 1 warning sign for Modern Healthcare Technology Holdings that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.