Is Pine Care Group (HKG:1989) Likely To Turn Things Around?

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Pine Care Group (HKG:1989), we don't think it's current trends fit the mold of a multi-bagger.

What is 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 Pine Care Group, this is the formula:

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

0.065 = HK$33m ÷ (HK$941m - HK$433m) (Based on the trailing twelve months to September 2020).

Thus, Pine Care Group has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 8.3%.

View our latest analysis for Pine Care Group

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 Pine Care Group, check out these free graphs here.

So How Is Pine Care Group's ROCE Trending?

On the surface, the trend of ROCE at Pine Care Group doesn't inspire confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 6.5%. 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, Pine Care Group's current liabilities are still rather high at 46% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Pine Care Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Pine Care Group is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 51% over the last three years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know more about Pine Care Group, we've spotted 4 warning signs, and 2 of them are concerning.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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