The Returns At EuroEyes International Eye Clinic (HKG:1846) Aren't Growing

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. So, when we ran our eye over EuroEyes International Eye Clinic's (HKG:1846) trend of ROCE, we liked what we saw.

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 EuroEyes International Eye Clinic is:

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

0.15 = HK$179m ÷ (HK$1.4b - HK$137m) (Based on the trailing twelve months to June 2021).

So, EuroEyes International Eye Clinic has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Healthcare industry.

See our latest analysis for EuroEyes International Eye Clinic

In the above chart we have measured EuroEyes International Eye Clinic's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for EuroEyes International Eye Clinic.

What Can We Tell From EuroEyes International Eye Clinic's ROCE Trend?

While the returns on capital are good, they haven't moved much. The company has employed 372% more capital in the last four years, and the returns on that capital have remained stable at 15%. Since 15% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, EuroEyes International Eye Clinic has done well to reduce current liabilities to 10% of total assets over the last four years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On EuroEyes International Eye Clinic's ROCE

The main thing to remember is that EuroEyes International Eye Clinic has proven its ability to continually reinvest at respectable rates of return. And since the stock has risen strongly over the last year, it appears the market might expect this trend to continue. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a final note, we've found 1 warning sign for EuroEyes International Eye Clinic that we think you should be aware of.

While EuroEyes International Eye Clinic 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.

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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