China Medical & HealthCare Group (HKG:383) Might Have The Makings Of A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, China Medical & HealthCare Group (HKG:383) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for China Medical & HealthCare Group:

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

0.014 = HK$32m ÷ (HK$3.4b - HK$1.2b) (Based on the trailing twelve months to June 2021).

Therefore, China Medical & HealthCare Group has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 13%.

Check out our latest analysis for China Medical & HealthCare Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Medical & HealthCare Group's ROCE against it's prior returns. If you're interested in investigating China Medical & HealthCare Group's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is China Medical & HealthCare Group's ROCE Trending?

We're delighted to see that China Medical & HealthCare Group is reaping rewards from its investments and has now broken into profitability. The company now earns 1.4% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by China Medical & HealthCare Group has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

One more thing to note, China Medical & HealthCare Group has decreased current liabilities to 35% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

To sum it up, China Medical & HealthCare Group is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has dived 80% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

While China Medical & HealthCare Group 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.