UMP Healthcare Holdings (HKG:722) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at UMP Healthcare Holdings (HKG:722), it didn't seem to tick all of these boxes.

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. The formula for this calculation on UMP Healthcare Holdings is:

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).

Thus, UMP Healthcare Holdings has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 9.4%.

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

When we looked at the ROCE trend at UMP Healthcare Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 7.6% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

The Key Takeaway

To conclude, we've found that UMP Healthcare Holdings is reinvesting in the business, but returns have been falling. Since the stock has declined 14% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing, we've spotted 4 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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