Medlive Technology (HKG:2192) Could Be Struggling To Allocate Capital

July 14, 2022
  •  Updated
October 31, 2022
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There are a few key trends to look for if we want to identify the next multi-bagger. 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 Medlive Technology (HKG:2192) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Medlive Technology:

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

0.015 = CN¥62m ÷ (CN¥4.1b - CN¥113m) (Based on the trailing twelve months to December 2021).

Thus, Medlive Technology has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Healthcare Services industry average of 9.9%.

Check out our latest analysis for Medlive Technology

SEHK:2192 Return on Capital Employed July 14th 2022

In the above chart we have measured Medlive Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Medlive Technology here for free.

What Does the ROCE Trend For Medlive Technology Tell Us?

When we looked at the ROCE trend at Medlive Technology, we didn't gain much confidence. Over the last three years, returns on capital have decreased to 1.5% from 41% three 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.

On a side note, Medlive Technology has done well to pay down its current liabilities to 2.8% 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.

What We Can Learn From Medlive Technology's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Medlive Technology. However, despite the promising trends, the stock has fallen 64% 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.

If you want to continue researching Medlive Technology, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Medlive Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether Medlive Technology is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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