What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at SWS Hemodialysis Care (SHSE:688410) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on SWS Hemodialysis Care is:

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

0.036 = CN¥64m ÷ (CN¥1.9b - CN¥167m) (Based on the trailing twelve months to June 2024).

Therefore, SWS Hemodialysis Care has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 6.4%.

In the above chart we have measured SWS Hemodialysis Care's 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 SWS Hemodialysis Care .

What Can We Tell From SWS Hemodialysis Care's ROCE Trend?

SWS Hemodialysis Care has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 3.6% which is a sight for sore eyes. In addition to that, SWS Hemodialysis Care is employing 668% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line

Overall, SWS Hemodialysis Care gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Given the stock has declined 51% in the last year, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

SWS Hemodialysis Care does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is significant...

While SWS Hemodialysis Care 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.