Will Wenzhou Kangning Hospital (HKG:2120) Multiply In Value Going Forward?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Wenzhou Kangning Hospital (HKG:2120), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Wenzhou Kangning Hospital, this is the formula:

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

0.046 = CN¥75m ÷ (CN¥2.3b - CN¥636m) (Based on the trailing twelve months to June 2020).

Thus, Wenzhou Kangning Hospital has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 9.8%.

Check out our latest analysis for Wenzhou Kangning Hospital

In the above chart we have measured Wenzhou Kangning Hospital'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 Wenzhou Kangning Hospital.

The Trend Of ROCE

When we looked at the ROCE trend at Wenzhou Kangning Hospital, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.6% from 16% five years ago. 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.

The Bottom Line On Wenzhou Kangning Hospital's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Wenzhou Kangning Hospital is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 34% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know about the risks facing Wenzhou Kangning Hospital, we've discovered 2 warning signs that you should be aware of.

While Wenzhou Kangning Hospital 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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