What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. In light of that, when we looked at Meinian Onehealth Healthcare Holdings (SZSE:002044) and its ROCE trend, we weren't exactly thrilled.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Meinian Onehealth Healthcare Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.06 = CN¥667m ÷ (CN¥19b - CN¥7.4b) (Based on the trailing twelve months to September 2023).
Therefore, Meinian Onehealth Healthcare Holdings has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 11%.
Check out our latest analysis for Meinian Onehealth Healthcare Holdings
In the above chart we have measured Meinian Onehealth Healthcare Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Meinian Onehealth Healthcare Holdings' ROCE Trending?
When we looked at the ROCE trend at Meinian Onehealth Healthcare Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.0% from 13% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by Meinian Onehealth Healthcare Holdings' reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 54% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
Meinian Onehealth Healthcare Holdings does have some risks though, and we've spotted 1 warning sign for Meinian Onehealth Healthcare Holdings that you might be interested in.
While Meinian Onehealth Healthcare Holdings 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.