Modern Healthcare Technology Holdings (HKG:919) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could 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 who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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).

Therefore, Modern Healthcare Technology Holdings has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 8.2%.

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. So we could link some of this to the decrease in ROCE. 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. Keep in mind 56% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Modern Healthcare Technology Holdings' ROCE

To conclude, we've found that Modern Healthcare Technology Holdings is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 63% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Modern Healthcare Technology Holdings has the makings of a multi-bagger.

If you'd like to know about the risks facing Modern Healthcare Technology Holdings, we've discovered 4 warning signs that you should be aware of.

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.