China Medical & HealthCare Group's (HKG:383) Returns On Capital Not Reflecting Well On The Business

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within China Medical & HealthCare Group (HKG:383), we weren't too hopeful.

What Is 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)

0.0071 = HK$14m ÷ (HK$3.3b - HK$1.3b) (Based on the trailing twelve months to June 2022).

So, China Medical & HealthCare Group has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 10%.

View our latest analysis for 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'd like to look at how China Medical & HealthCare Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

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

In terms of China Medical & HealthCare Group's historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 1.5% five years ago but has since fallen to 0.7%. In addition to that, China Medical & HealthCare Group is now employing 20% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line On China Medical & HealthCare Group's ROCE

To see China Medical & HealthCare Group reducing the capital employed in the business in tandem with diminishing returns, is concerning. This could explain why the stock has sunk a total of 77% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know about the risks facing China Medical & HealthCare Group, we've discovered 1 warning sign that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.