Capital Allocation Trends At C-MER Eye Care Holdings (HKG:3309) Aren't Ideal

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at C-MER Eye Care Holdings (HKG:3309) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 C-MER Eye Care Holdings:

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

0.012 = HK$29m ÷ (HK$2.9b - HK$530m) (Based on the trailing twelve months to June 2022).

Thus, C-MER Eye Care Holdings has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 10%.

View our latest analysis for C-MER Eye Care Holdings

In the above chart we have measured C-MER Eye Care Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering C-MER Eye Care Holdings here for free.

What Does the ROCE Trend For C-MER Eye Care Holdings Tell Us?

On the surface, the trend of ROCE at C-MER Eye Care Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 31% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From C-MER Eye Care Holdings' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for C-MER Eye Care Holdings. However, despite the promising trends, the stock has fallen 16% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a separate note, we've found 3 warning signs for C-MER Eye Care Holdings you'll probably want to know about.

While C-MER Eye Care Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.