Life Healthcare Group (HKG:928) Is Looking To Continue Growing Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Life Healthcare Group (HKG:928) and its trend of ROCE, we really liked what we saw.

Understanding 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. To calculate this metric for Life Healthcare Group, this is the formula:

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

0.0093 = HK$2.8m ÷ (HK$325m - HK$30m) (Based on the trailing twelve months to March 2021).

Thus, Life Healthcare Group has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 9.7%.

Check out our latest analysis for Life Healthcare Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Life Healthcare Group, check out these free graphs here.

What Can We Tell From Life Healthcare Group's ROCE Trend?

We're delighted to see that Life Healthcare Group is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 0.9% on its capital. In addition to that, Life Healthcare Group is employing 351% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 9.3%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

To the delight of most shareholders, Life Healthcare Group has now broken into profitability. Although the company may be facing some issues elsewhere since the stock has plunged 84% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Life Healthcare Group does have some risks, we noticed 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.

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