China Resources Medical Holdings (HKG:1515) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at China Resources Medical Holdings (HKG:1515) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for China Resources Medical Holdings, this is the formula:

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

0.044 = CN¥299m ÷ (CN¥9.0b - CN¥2.2b) (Based on the trailing twelve months to December 2020).

So, China Resources Medical Holdings has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 9.3%.

See our latest analysis for China Resources Medical Holdings

In the above chart we have measured China Resources Medical Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering China Resources Medical Holdings here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at China Resources Medical Holdings doesn't inspire confidence. Around five years ago the returns on capital were 9.6%, but since then they've fallen to 4.4%. 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On China Resources Medical Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that China Resources Medical Holdings is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 43% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we've found 3 warning signs for China Resources Medical Holdings that we think you should be aware of.

While China Resources Medical Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.
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