Should You Be Impressed By Hospital Corporation of China's (HKG:3869) Returns on Capital?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 briefly looking over the numbers, we don't think Hospital Corporation of China (HKG:3869) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Hospital Corporation of China is:

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

0.049 = CN¥144m ÷ (CN¥3.8b - CN¥926m) (Based on the trailing twelve months to June 2020).

So, Hospital Corporation of China has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 9.8%.

View our latest analysis for Hospital Corporation of China

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hospital Corporation of China's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hospital Corporation of China, check out these free graphs here.

The Trend Of ROCE

In terms of Hospital Corporation of China's historical ROCE trend, it doesn't exactly demand attention. The company has employed 157% more capital in the last five years, and the returns on that capital have remained stable at 4.9%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 24% of total assets, this reported ROCE would probably be less than4.9% because total capital employed would be higher.The 4.9% ROCE could be even lower if current liabilities weren't 24% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

The Key Takeaway

As we've seen above, Hospital Corporation of China's returns on capital haven't increased but it is reinvesting in the business. Since the stock has declined 19% over the last three years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Hospital Corporation of China does have some risks though, and we've spotted 1 warning sign for Hospital Corporation of China that you might be interested in.

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.

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