Beware of Modern Health Tech Holdings (HKG:919) and its Returns on Capital

What trends should we look for if we want to identify stocks that can multiply in value over the long term? First, we would like to identify a growth to return to on capital employed (ROCE) and at the same time, a base capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. However, after briefly looking at the numbers, we don’t think Modern Healthcare Technology Holdings (HKG:919) has the makings of a multi-bagger in the future, but let’s see why it might be.

Understanding return on capital employed (ROCE)

For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. Analysts use this formula to calculate it for Modern Healthcare Technology Holdings:

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

0.054 = HK$15 million ÷ (HK$640 million – HK$361 million) (Based on the last twelve months to September 2021).

Thereby, Modern Healthcare Technology Holdings has a ROCE of 5.4%. In absolute terms, this is a weak return and it is also below the consumer services industry average of 9.9%.

Check out our latest analysis for Modern Healthcare Technology Holdings

SEHK:919 Return on Capital Employed May 4, 2022

Historical performance is a great starting point when researching a stock. So above you can see Modern Healthcare Technology Holdings’ ROCE gauge relative to its past returns. If you want to dive deep into Modern Healthcare Technology Holdings Earnings, Revenue, and Cash Flow History, check out these free graphics here.

What can we say about the ROCE trend of Modern Healthcare Technology Holdings?

When we looked at the ROCE trend at Modern Healthcare Technology Holdings, we didn’t gain much confidence. To be more specific, ROCE has fallen by 27% over the past five years. However, it looks like Modern Healthcare Technology Holdings could reinvest for long-term growth because while capital employed has increased, the company’s sales haven’t changed much over the past 12 months. It’s worth keeping an eye on the company’s earnings going forward to see if those investments end up contributing to the bottom line.

By the way, Modern Healthcare Technology Holdings did well to pay off short-term debt at 56% of total assets. This could partly explain why ROCE fell. In effect, this means that their suppliers or short-term creditors finance the business less, which reduces certain elements of risk. Since the company is essentially funding more of its operations with its own money, one could argue that this has made the company less efficient at generating ROCE. Keep in mind that 56% is still quite high, so these risks are still somewhat prevalent.

The essential

In summary, Modern Healthcare Technology Holdings is reinvesting funds into the business for growth, but unfortunately, it appears sales haven’t grown much yet. Considering the stock has fallen 60% in the past five years, investors may not be too optimistic that this trend is improving either. Overall, we’re not overly inspired by the underlying trends and think there may be a better chance of finding a multi-bagger elsewhere.

One more thing to note, we have identified 4 warning signs with Modern Healthcare Technology Holdings and understanding them should be part of your investment process.

Although Modern Healthcare Technology Holdings isn’t currently generating the highest returns, we’ve compiled a list of companies that are currently generating over 25% return on equity. look at this free list here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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