To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. 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.
Understanding 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 Chaoju Eye Care Holdings is:
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).
So, Chaoju Eye Care Holdings has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Healthcare industry.
See 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're interested, you can view the analysts predictions in our free analyst report for Chaoju Eye Care Holdings .
What Can We Tell From Chaoju Eye Care Holdings' ROCE Trend?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 260% more capital in the last five years, and the returns on that capital have remained stable at 12%. 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.
What We Can Learn From Chaoju Eye Care Holdings' ROCE
In the end, Chaoju Eye Care Holdings has proven its ability to adequately reinvest capital at good rates of return. Yet over the last three years the stock has declined 15%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
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 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. 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.