Some Investors May Be Worried About Zhongchao's (NASDAQ:ZCMD) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Zhongchao (NASDAQ:ZCMD), we don't think it's current trends fit the mold of a multi-bagger.

What is 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. The formula for this calculation on Zhongchao is:

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

0.10 = US$3.5m ÷ (US$37m - US$3.6m) (Based on the trailing twelve months to June 2021).

Therefore, Zhongchao has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.4% generated by the Consumer Services industry.

Check out our latest analysis for Zhongchao

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

So How Is Zhongchao's ROCE Trending?

On the surface, the trend of ROCE at Zhongchao doesn't inspire confidence. Over the last three years, returns on capital have decreased to 10% from 25% three 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Zhongchao 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 year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Zhongchao 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.

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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.