I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on C-MER Eye Care Holdings Limited (HKG:3309) stock.
C-MER Eye Care Holdings stock represents an ownership share in the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. Your return is tied to 3309’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. To understand C-MER Eye Care Holdings’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.
What is Return on Capital Employed (ROCE)?
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. We’ll look at C-MER Eye Care Holdings’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. 3309’s ROCE is calculated below:
ROCE Calculation for 3309
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = HK$57.87m ÷ (HK$233.38m – HK$75.27m) = 36.60%
As you can see, 3309 earned HK$36.6 from every HK$100 you invested over the previous twelve months. This shows C-MER Eye Care Holdings provides a great return on capital employed that is well above the 15% ROCE that is typically considered to be a strong benchmark. As a result, if 3309 is clever with their reinvestments or dividend payments, investors can grow their capital at an enviable rate over time.
A deeper look
3309 is efficient with the use of capital, but this is only the case if 3309 continues to maintain the presently healthy ROCE, which will change if the company either earns less or requires more capital to create earnings. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. If you go back three years, you’ll find that 3309’s ROCE has decreased from 72.68%. We can see that earnings have actually increased from HK$27.70m to HK$57.87m but capital employed has grown by a relatively larger volume due to a hike in the level of total assets , which suggests investor’s ROCE has fallen because the company requires more capital to create earnings despite the previous growth in EBT.
Despite 3309’s downward trend in ROCE in the recent past, the company still remains an attractive candidate that is capable of producing solid capital returns and a potentially strong return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation. Without considering these fundamentals, you cannot be sure if the downward path is a signal to run, or just a blip in an otherwise solid return profile. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate 3309 or other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for 3309’s future growth? Take a look at our free research report of analyst consensus for 3309’s outlook.
- Valuation: What is 3309 worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 3309 is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.