Here's What's Concerning About Adicon Holdings' (HKG:9860) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Adicon Holdings (HKG:9860) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for Adicon Holdings:

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

0.14 = CN¥435m ÷ (CN¥4.7b - CN¥1.6b) (Based on the trailing twelve months to June 2024).

Therefore, Adicon Holdings has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Healthcare industry.

See our latest analysis for Adicon Holdings

In the above chart we have measured Adicon Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Adicon Holdings .

What The Trend Of ROCE Can Tell Us

In terms of Adicon Holdings' historical ROCE movements, the trend isn't fantastic. Around three years ago the returns on capital were 28%, but since then they've fallen to 14%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Adicon Holdings' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Adicon Holdings have fallen, meanwhile the business is employing more capital than it was three years ago. It should come as no surprise then that the stock has fallen 31% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Adicon Holdings could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 9860 on our platform quite valuable.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.