Modern Healthcare Technology Holdings (HKG:919) reinvests at lower rates of return
What are the early trends to look for to identify a stock that could 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 based 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 unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the 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).
So, Modern Healthcare Technology Holdings has a ROCE of 5.4%. Ultimately, that’s a weak performer, and it’s below the consumer services industry average of 8.2%.
Check out our latest analysis for Modern Healthcare Technology Holdings
Historical performance is a great starting point when researching a stock. So you can see Modern Healthcare Technology Holdings’ ROCE gauge above compared 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. So we could tie some of that to the decline in ROCE. In effect, this means that their suppliers or short-term creditors finance the business less, which reduces certain elements of risk. Some would argue that this reduces the company’s effectiveness in generating a return on investment, as it now finances more operations with its own money. Keep in mind that 56% is still quite high, so these risks are still somewhat prevalent.
Our view on the ROCE of Modern Healthcare Technology Holdings
To conclude, we found that Modern Healthcare Technology Holdings was reinvesting in the business, but returns were down. And over the past five years, the stock has fallen 63%, so the market doesn’t seem too optimistic about these trends strengthening anytime soon. Therefore, based on the analysis performed in this article, we do not believe that Modern Healthcare Technology Holdings has the makings of a multi-bagger.
If you want to know more about the risks facing Modern Healthcare Technology Holdings, we found out 4 warning signs which you should be aware of.
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.
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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.