Returns On Capital Signal Tricky Times Ahead For Guangdong Kanghua Healthcare (HKG:3689)

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Guangdong Kanghua Healthcare (HKG:3689), it didn't seem to tick all of these boxes.

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)

0.061 = CN¥115m ÷ (CN¥2.6b - CN¥758m) (Based on the trailing twelve months to June 2021).

Therefore, Guangdong Kanghua Healthcare has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 13%.

View our latest analysis for Guangdong Kanghua Healthcare

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'd like to look at how Guangdong Kanghua Healthcare has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Guangdong Kanghua Healthcare's ROCE Trend?

In terms of Guangdong Kanghua Healthcare's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 24% over the last five years. 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.

On a side note, Guangdong Kanghua Healthcare has done well to pay down its current liabilities to 29% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Guangdong Kanghua Healthcare's ROCE

To conclude, we've found that Guangdong Kanghua Healthcare is reinvesting in the business, but returns have been falling. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 75% in the last five years. Therefore based on the analysis done in this article, we don't think Guangdong Kanghua Healthcare has the makings of a multi-bagger.

One more thing, we've spotted 1 warning sign facing Guangdong Kanghua Healthcare that you might find interesting.

While Guangdong Kanghua Healthcare 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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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.