Returns On Capital At Hygeia Healthcare Holdings (HKG:6078) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating Hygeia Healthcare Holdings (HKG:6078), we don't think it's current trends fit the mold of a multi-bagger.

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What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Hygeia Healthcare Holdings, this is the formula:

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

0.09 = CN¥819m ÷ (CN¥11b - CN¥1.8b) (Based on the trailing twelve months to December 2024).

Therefore, Hygeia Healthcare Holdings has an ROCE of 9.0%. On its own, that's a low figure but it's around the 8.2% average generated by the Healthcare industry.

View our latest analysis for Hygeia Healthcare Holdings

Above you can see how the current ROCE for Hygeia Healthcare Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Hygeia Healthcare Holdings .

So How Is Hygeia Healthcare Holdings' ROCE Trending?

When we looked at the ROCE trend at Hygeia Healthcare Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 36%, but since then they've fallen to 9.0%. However it looks like Hygeia Healthcare Holdings 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 related note, Hygeia Healthcare Holdings has decreased its current liabilities to 16% of total assets. Considering it used to be 77%, that's a huge drop in that ratio and it would explain the decline in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

The Bottom Line

In summary, Hygeia Healthcare Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 62% 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.

Hygeia Healthcare Holdings could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 6078 on our platform quite valuable.

While Hygeia Healthcare Holdings 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.