Mediwelcome Healthcare Management & Technology (HKG:2159) Might Be Having Difficulty Using Its Capital Effectively

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Mediwelcome Healthcare Management & Technology (HKG:2159) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Mediwelcome Healthcare Management & Technology:

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

0.022 = CN¥6.7m ÷ (CN¥367m - CN¥57m) (Based on the trailing twelve months to December 2021).

Thus, Mediwelcome Healthcare Management & Technology has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 12%.

Check out our latest analysis for Mediwelcome Healthcare Management & Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mediwelcome Healthcare Management & Technology's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Mediwelcome Healthcare Management & Technology, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at Mediwelcome Healthcare Management & Technology, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 2.2% from 38% four years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Mediwelcome Healthcare Management & Technology has decreased its current liabilities to 16% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Mediwelcome Healthcare Management & Technology. However, despite the promising trends, the stock has fallen 38% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 4 warning signs with Mediwelcome Healthcare Management & Technology (at least 2 which make us uncomfortable) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.