Be Wary Of Bamboos Health Care Holdings (HKG:2293) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 investigating Bamboos Health Care Holdings (HKG:2293), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Bamboos Health Care Holdings:

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

0.19 = HK$43m ÷ (HK$328m - HK$105m) (Based on the trailing twelve months to December 2023).

Therefore, Bamboos Health Care Holdings has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Healthcare industry.

See our latest analysis for Bamboos Health Care Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Bamboos Health Care Holdings' ROCE against it's prior returns. If you're interested in investigating Bamboos Health Care Holdings' past further, check out this free graph covering Bamboos Health Care Holdings' past earnings, revenue and cash flow.

What Can We Tell From Bamboos Health Care Holdings' ROCE Trend?

In terms of Bamboos Health Care Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 37%, but since then they've fallen to 19%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 32%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 19%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Key Takeaway

We're a bit apprehensive about Bamboos Health Care Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Bamboos Health Care Holdings does have some risks though, and we've spotted 2 warning signs for Bamboos Health Care Holdings that you might be interested in.

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

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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.