Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Adicon Holdings (HKG:9860) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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 Adicon Holdings:

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

0.18 = CN¥505m ÷ (CN¥4.6b - CN¥1.8b) (Based on the trailing twelve months to December 2023).

Therefore, Adicon Holdings has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 10% it's much better.

In the above chart we have measured Adicon Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Adicon Holdings .

What The Trend Of ROCE Can Tell Us

In terms of Adicon Holdings' historical ROCE movements, the trend isn't fantastic. Around three years ago the returns on capital were 24%, but since then they've fallen to 18%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Adicon Holdings' ROCE

In summary, we're somewhat concerned by Adicon Holdings' diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 33% from where it was year ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to continue researching Adicon Holdings, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.

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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.

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