If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. With that in mind, we've noticed some promising trends at Ma Kuang Healthcare Holding (GTSM:4139) so let's look a bit deeper.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Ma Kuang Healthcare Holding:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = NT$60m ÷ (NT$1.4b - NT$478m) (Based on the trailing twelve months to December 2020).
Therefore, Ma Kuang Healthcare Holding has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 8.5%.
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'd like to look at how Ma Kuang Healthcare Holding has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Ma Kuang Healthcare Holding's ROCE Trending?
Ma Kuang Healthcare Holding has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 6.4% on its capital. While returns have increased, the amount of capital employed by Ma Kuang Healthcare Holding has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.
The Bottom Line On Ma Kuang Healthcare Holding's ROCE
As discussed above, Ma Kuang Healthcare Holding appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Considering the stock has delivered 15% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
One more thing, we've spotted 3 warning signs facing Ma Kuang Healthcare Holding that you might find interesting.
While Ma Kuang Healthcare Holding isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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