There Are Reasons To Feel Uneasy About EuroEyes International Eye Clinic's (HKG:1846) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating EuroEyes International Eye Clinic (HKG:1846), we don't think it's current trends fit the mold of a multi-bagger.

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 EuroEyes International Eye Clinic:

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

0.093 = HK$110m ÷ (HK$1.3b - HK$127m) (Based on the trailing twelve months to December 2020).

Therefore, EuroEyes International Eye Clinic has an ROCE of 9.3%. In absolute terms, that's a low return but it's around the Healthcare industry average of 9.8%.

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 Does the ROCE Trend For EuroEyes International Eye Clinic Tell Us?

On the surface, the trend of ROCE at EuroEyes International Eye Clinic doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last four years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, EuroEyes International Eye Clinic has done well to pay down its current liabilities to 9.6% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that EuroEyes International Eye Clinic is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 92% over the last year, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching EuroEyes International Eye Clinic, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.

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This article by Simply Wall St is general in nature. 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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