Returns On Capital At Yestar Healthcare Holdings (HKG:2393) Have Hit The Brakes

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Yestar Healthcare Holdings (HKG:2393), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Yestar Healthcare Holdings is:

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

0.13 = CN¥183m ÷ (CN¥4.7b - CN¥3.3b) (Based on the trailing twelve months to December 2020).

Thus, Yestar Healthcare Holdings has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Medical Equipment industry.

Check out our latest analysis for Yestar Healthcare Holdings

Above you can see how the current ROCE for Yestar Healthcare Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Yestar Healthcare Holdings here for free.

How Are Returns Trending?

We're a bit concerned with the trends, because the business is applying 32% less capital than it was five years ago and returns on that capital have stayed flat. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. You could assume that if this continues, the business will be smaller in a few year time, so probably not a multi-bagger.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 71% of total assets, this reported ROCE would probably be less than13% because total capital employed would be higher.The 13% ROCE could be even lower if current liabilities weren't 71% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

In Conclusion...

It's a shame to see that Yestar Healthcare Holdings is effectively shrinking in terms of its capital base. And in the last five years, the stock has given away 65% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 2 warning signs with Yestar Healthcare Holdings and understanding these should be part of your investment process.

While Yestar Healthcare 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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