The Return Trends At New Century Healthcare Holding (HKG:1518) Look Promising

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in New Century Healthcare Holding's (HKG:1518) returns on capital, so let's have a 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. Analysts use this formula to calculate it for New Century Healthcare Holding:

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

0.15 = CN¥90m ÷ (CN¥910m - CN¥324m) (Based on the trailing twelve months to June 2023).

Thus, New Century Healthcare Holding has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 11% it's much better.

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 want to delve into the historical earnings, revenue and cash flow of New Century Healthcare Holding, check out these free graphs here.

What Does the ROCE Trend For New Century Healthcare Holding Tell Us?

You'd find it hard not to be impressed with the ROCE trend at New Century Healthcare Holding. The data shows that returns on capital have increased by 44% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 54% less than it was five years ago, which can be indicative of a business that's improving its efficiency. 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 36% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From 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. However the stock is down a substantial 92% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

On a final note, we found 3 warning signs for New Century Healthcare Holding (1 is concerning) you should be aware of.

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.