Why We Like The Returns At New Century Healthcare Holding (HKG:1518)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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.

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Return On Capital Employed (ROCE): What Is It?

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 New Century Healthcare Holding is:

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

0.22 = CN¥143m ÷ (CN¥939m - CN¥292m) (Based on the trailing twelve months to December 2024).

Therefore, New Century Healthcare Holding has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 8.2% earned by companies in a similar industry.

See 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 , check out these free graphs detailing revenue and cash flow performance of New Century Healthcare Holding.

What Can We Tell From New Century Healthcare Holding's ROCE Trend?

We're pretty happy with how the ROCE has been trending at New Century Healthcare Holding. The figures show that over the last five years, returns on capital have grown by 415%. 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 59% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 31% of the business, which is more than it was five years ago. 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.

In Conclusion...

In summary, it's great to see that New Century Healthcare Holding has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 12% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 3 warning signs facing New Century Healthcare Holding that you might find interesting.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.