Chaoju Eye Care Holdings (HKG:2219) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Chaoju Eye Care Holdings (HKG:2219), 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. Analysts use this formula to calculate it for Chaoju Eye Care Holdings:

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

0.09 = CN¥211m ÷ (CN¥2.6b - CN¥246m) (Based on the trailing twelve months to June 2022).

So, Chaoju Eye Care Holdings has an ROCE of 9.0%. On its own, that's a low figure but it's around the 9.6% average generated by the Healthcare industry.

See our latest analysis for Chaoju Eye Care Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Chaoju Eye Care Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Chaoju Eye Care Holdings' ROCE Trending?

In terms of Chaoju Eye Care Holdings' historical ROCE movements, the trend isn't fantastic. Around three years ago the returns on capital were 15%, but since then they've fallen to 9.0%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Chaoju Eye Care Holdings has done well to pay down its current liabilities to 9.5% 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. 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 Key Takeaway

Bringing it all together, while we're somewhat encouraged by Chaoju Eye Care Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 56% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Chaoju Eye Care Holdings has the makings of a multi-bagger.

If you're still interested in Chaoju Eye Care Holdings it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.