There Are Reasons To Feel Uneasy About Honliv Healthcare Management Group's (HKG:9906) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Honliv Healthcare Management Group (HKG:9906) 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?

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 Honliv Healthcare Management Group, this is the formula:

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

0.095 = CN¥56m ÷ (CN¥993m - CN¥408m) (Based on the trailing twelve months to June 2024).

So, Honliv Healthcare Management Group has an ROCE of 9.5%. In absolute terms, that's a low return but it's around the Healthcare industry average of 8.2%.

See our latest analysis for Honliv Healthcare Management Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Honliv Healthcare Management Group's ROCE against it's prior returns. If you're interested in investigating Honliv Healthcare Management Group's past further, check out this free graph covering Honliv Healthcare Management Group's past earnings, revenue and cash flow.

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

On the surface, the trend of ROCE at Honliv Healthcare Management Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.5% from 54% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Honliv Healthcare Management Group has done well to pay down its current liabilities to 41% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Honliv Healthcare Management Group is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 21% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to continue researching Honliv Healthcare Management Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.

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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.