Here's What's Concerning About UMP Healthcare Holdings' (HKG:722) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating UMP Healthcare Holdings (HKG:722), we don't think it's current trends fit the mold of a multi-bagger.

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

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. To calculate this metric for UMP Healthcare Holdings, this is the formula:

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

0.057 = HK$42m ÷ (HK$937m - HK$204m) (Based on the trailing twelve months to December 2020).

So, UMP Healthcare Holdings has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 9.3%.

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 want to delve into the historical earnings, revenue and cash flow of UMP Healthcare Holdings, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at UMP Healthcare Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 7.6%, but since then they've fallen to 5.7%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On UMP Healthcare Holdings' ROCE

In summary, UMP Healthcare Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 19% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 4 warning signs with UMP Healthcare Holdings and understanding these should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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