Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Onyx Healthcare (GTSM:6569) and its ROCE trend, we weren't exactly thrilled.
What is 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. The formula for this calculation on Onyx Healthcare is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = NT$132m ÷ (NT$1.3b - NT$252m) (Based on the trailing twelve months to September 2020).
Thus, Onyx Healthcare has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Healthcare Services industry.
Check out our latest analysis for Onyx Healthcare
Historical performance is a great place to start when researching a stock so above you can see the gauge for Onyx Healthcare's ROCE against it's prior returns. If you're interested in investigating Onyx Healthcare's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Onyx Healthcare's ROCE Trend?
On the surface, the trend of ROCE at Onyx Healthcare doesn't inspire confidence. Over the last five years, returns on capital have decreased to 13% from 43% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a side note, Onyx Healthcare has done well to pay down its current liabilities to 19% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.In Conclusion...
In summary, we're somewhat concerned by Onyx Healthcare's diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last three yearsthe stock has delivered a respectable 31% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
On a final note, we've found 1 warning sign for Onyx Healthcare that we think you should be aware of.
While Onyx Healthcare 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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This article by Simply Wall St is general in nature. 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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About TPEX:6569
Onyx Healthcare
A professional medical IT company, engages in the design, manufacturing, and trading of medical computers and peripherals for hospital/clinical IT market in Taiwan.
Excellent balance sheet with questionable track record.
