Here's What To Make Of UMP Healthcare Holdings' (HKG:722) Decelerating Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at UMP Healthcare Holdings (HKG:722) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for UMP Healthcare Holdings:

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

0.096 = HK$74m ÷ (HK$971m - HK$200m) (Based on the trailing twelve months to December 2021).

Therefore, UMP Healthcare Holdings has an ROCE of 9.6%. Even though it's in line with the industry average of 9.6%, it's still a low return by itself.

View our latest analysis for UMP Healthcare Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for UMP Healthcare Holdings' ROCE against it's prior returns. If you'd like to look at how UMP Healthcare Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The returns on capital haven't changed much for UMP Healthcare Holdings in recent years. The company has employed 92% more capital in the last five years, and the returns on that capital have remained stable at 9.6%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

In conclusion, UMP Healthcare Holdings has been investing more capital into the business, but returns on that capital haven't increased. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 77% in the last five years. Therefore based on the analysis done in this article, we don't think UMP Healthcare Holdings has the makings of a multi-bagger.

One more thing, we've spotted 6 warning signs facing UMP Healthcare Holdings that you might find interesting.

While UMP 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.