Town Health International Medical Group (HKG:3886) 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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Town Health International Medical Group (HKG:3886) so let's look a bit deeper.

What is 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 Town Health International Medical Group is:

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

0.026 = HK$114m ÷ (HK$4.7b - HK$421m) (Based on the trailing twelve months to December 2021).

Thus, Town Health International Medical Group has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 9.9%.

See our latest analysis for Town Health International Medical Group

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

How Are Returns Trending?

Shareholders will be relieved that Town Health International Medical Group has broken into profitability. The company now earns 2.6% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Town Health International Medical Group has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

What We Can Learn From Town Health International Medical Group's ROCE

As discussed above, Town Health International Medical Group appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 59% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

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

While Town Health International Medical Group 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.