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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Chaoju Eye Care Holdings (HKG:2219) looks decent, right now, so lets see what the trend of returns can tell us.
What Is Return On Capital Employed (ROCE)?
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 Chaoju Eye Care Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = CN¥296m ÷ (CN¥2.8b - CN¥323m) (Based on the trailing twelve months to June 2024).
Thus, Chaoju Eye Care Holdings has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 8.6% it's much better.
Check out our latest analysis for Chaoju Eye Care Holdings
Above you can see how the current ROCE for Chaoju Eye Care Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Chaoju Eye Care Holdings for free.
What Does the ROCE Trend For Chaoju Eye Care Holdings Tell Us?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 260% in that time. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
On a side note, Chaoju Eye Care Holdings has done well to reduce current liabilities to 11% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
The Bottom Line On Chaoju Eye Care Holdings' ROCE
The main thing to remember is that Chaoju Eye Care Holdings has proven its ability to continually reinvest at respectable rates of return. However, despite the favorable fundamentals, the stock has fallen 58% over the last three years, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
On a separate note, we've found 1 warning sign for Chaoju Eye Care Holdings you'll probably want to know about.
While Chaoju Eye Care Holdings 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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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.