The Returns On Capital At Bamboos Health Care Holdings (HKG:2293) Don't Inspire Confidence

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So while Bamboos Health Care Holdings (HKG:2293) has a high ROCE right now, lets see what we can decipher from how returns are changing.

What is Return On Capital Employed (ROCE)?

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 Bamboos Health Care Holdings is:

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

0.23 = HK$37m ÷ (HK$195m - HK$31m) (Based on the trailing twelve months to December 2020).

Thus, Bamboos Health Care Holdings has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Healthcare industry average of 9.6%.

View 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 want to delve into the historical earnings, revenue and cash flow of Bamboos Health Care Holdings, check out these free graphs here.

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

On the surface, the trend of ROCE at Bamboos Health Care Holdings doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 41%. 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.

What We Can Learn From Bamboos Health Care Holdings' ROCE

In summary, Bamboos Health Care Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last five years has been flat. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know about the risks facing Bamboos Health Care Holdings, we've discovered 2 warning signs that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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