Some Investors May Be Worried About Mediwelcome Healthcare Management & Technology's (HKG:2159) 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Mediwelcome Healthcare Management & Technology (HKG:2159), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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 Mediwelcome Healthcare Management & Technology, this is the formula:

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

0.068 = CN¥21m ÷ (CN¥398m - CN¥90m) (Based on the trailing twelve months to June 2021).

Thus, Mediwelcome Healthcare Management & Technology has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 13%.

See 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.

So How Is Mediwelcome Healthcare Management & Technology's ROCE Trending?

When we looked at the ROCE trend at Mediwelcome Healthcare Management & Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 37% over the last three 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 related note, Mediwelcome Healthcare Management & Technology has decreased its current liabilities to 23% of total assets. That could partly explain why the ROCE has dropped. 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 On Mediwelcome Healthcare Management & Technology's ROCE

While returns have fallen for Mediwelcome Healthcare Management & Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 65% 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 3 warning signs with Mediwelcome Healthcare Management & Technology (at least 1 which is potentially serious) , and understanding these would certainly be useful.

While Mediwelcome Healthcare Management & Technology 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.