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? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 briefly looking over the numbers, we don't think EuroEyes International Eye Clinic (HKG:1846) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for EuroEyes International Eye Clinic, this is the formula:

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

0.13 = HK$173m ÷ (HK$1.5b - HK$183m) (Based on the trailing twelve months to June 2022).

Therefore, EuroEyes International Eye Clinic has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 10% generated by the Healthcare industry.

Our analysis indicates that 1846 is potentially undervalued!

Above you can see how the current ROCE for EuroEyes International Eye Clinic compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for EuroEyes International Eye Clinic.

The Trend Of ROCE

On the surface, the trend of ROCE at EuroEyes International Eye Clinic doesn't inspire confidence. To be more specific, ROCE has fallen from 17% over the last five years. However it looks like EuroEyes International Eye Clinic might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, EuroEyes International Eye Clinic has decreased its current liabilities to 12% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

To conclude, we've found that EuroEyes International Eye Clinic is reinvesting in the business, but returns have been falling. Since the stock has declined 33% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think EuroEyes International Eye Clinic has the makings of a multi-bagger.

If you're still interested in EuroEyes International Eye Clinic it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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. 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.