Chaoju Eye Care Holdings (HKG:2219) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Chaoju Eye Care Holdings (HKG:2219), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Chaoju Eye Care Holdings is:

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

0.09 = CN¥212m ÷ (CN¥2.6b - CN¥246m) (Based on the trailing twelve months to June 2022).

Therefore, Chaoju Eye Care Holdings has an ROCE of 9.0%. In absolute terms, that's a low return but it's around the Healthcare industry average of 10%.

View our latest analysis for Chaoju Eye Care Holdings

Above you can see how the current ROCE for Chaoju Eye Care Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

On the surface, the trend of ROCE at Chaoju Eye Care Holdings doesn't inspire confidence. Over the last three years, returns on capital have decreased to 9.0% from 15% three years ago. However it looks like Chaoju Eye Care Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Chaoju Eye Care Holdings has decreased its current liabilities to 9.5% 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. 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.

Our Take On Chaoju Eye Care Holdings' ROCE

To conclude, we've found that Chaoju Eye Care Holdings is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 14% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Chaoju Eye Care Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

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.