Returns At New Century Healthcare Holding (HKG:1518) Are On The Way Up

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at New Century Healthcare Holding (HKG:1518) so let's look a bit deeper.

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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 New Century Healthcare Holding is:

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

0.11 = CN¥64m ÷ (CN¥837m - CN¥274m) (Based on the trailing twelve months to June 2025).

Therefore, New Century Healthcare Holding has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.2% generated by the Healthcare industry.

Check out our latest analysis for New Century Healthcare Holding

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'd like to look at how New Century Healthcare Holding has performed in the past in other metrics, you can view this free graph of New Century Healthcare Holding's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

You'd find it hard not to be impressed with the ROCE trend at New Century Healthcare Holding. The figures show that over the last five years, returns on capital have grown by 2,794%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, New Century Healthcare Holding appears to been achieving more with less, since the business is using 55% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 33% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line On New Century Healthcare Holding's ROCE

In the end, New Century Healthcare Holding has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 54% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

New Century Healthcare Holding does have some risks though, and we've spotted 2 warning signs for New Century Healthcare Holding that you might be interested in.

While New Century Healthcare Holding 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.