Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Qianhai Health Holdings (HKG:911) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
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 Qianhai Health Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = HK$75m ÷ (HK$525m - HK$125m) (Based on the trailing twelve months to June 2024).
Therefore, Qianhai Health Holdings has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 7.2% generated by the Electronic industry.
Check out our latest analysis for Qianhai Health Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Qianhai Health Holdings' ROCE against it's prior returns. If you're interested in investigating Qianhai Health Holdings' past further, check out this free graph covering Qianhai Health Holdings' past earnings, revenue and cash flow.
What Can We Tell From Qianhai Health Holdings' ROCE Trend?
It's great to see that Qianhai Health Holdings has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 19% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 38%. Qianhai Health Holdings could be selling under-performing assets since the ROCE is improving.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 24% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
Our Take On Qianhai Health Holdings' ROCE
From what we've seen above, Qianhai Health Holdings has managed to increase it's returns on capital all the while reducing it's capital base. However the stock is down a substantial 87% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
If you want to know some of the risks facing Qianhai Health Holdings we've found 3 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.