Stock Analysis

Capital Allocation Trends At Guangdong Kanghua Healthcare (HKG:3689) Aren't Ideal

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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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Guangdong Kanghua Healthcare (HKG:3689), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Guangdong Kanghua Healthcare:

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

0.037 = CN¥69m ÷ (CN¥2.7b - CN¥826m) (Based on the trailing twelve months to June 2022).

Thus, Guangdong Kanghua Healthcare has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 10%.

View our latest analysis for Guangdong Kanghua Healthcare

SEHK:3689 Return on Capital Employed February 2nd 2023

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Guangdong Kanghua Healthcare, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at Guangdong Kanghua Healthcare, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.7% from 16% five years ago. However it looks like Guangdong Kanghua Healthcare might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

Our Take On Guangdong Kanghua Healthcare's ROCE

In summary, Guangdong Kanghua Healthcare is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Moreover, since the stock has crumbled 79% over the last five years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Guangdong Kanghua Healthcare has the makings of a multi-bagger.

One final note, you should learn about the 4 warning signs we've spotted with Guangdong Kanghua Healthcare (including 2 which are potentially serious) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Valuation is complex, but we're helping make it simple.

Find out whether Guangdong Kanghua Healthcare is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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