If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Speaking of which, we noticed some great changes in Lotus Health Group's (SHSE:600186) returns on capital, so let's have a look.
What Is 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. To calculate this metric for Lotus Health Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.076 = CN¥94m ÷ (CN¥2.4b - CN¥1.2b) (Based on the trailing twelve months to June 2023).
Therefore, Lotus Health Group has an ROCE of 7.6%. Even though it's in line with the industry average of 7.6%, it's still a low return by itself.
View our latest analysis for Lotus Health Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Lotus Health Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Lotus Health Group, check out these free graphs here.
What Does the ROCE Trend For Lotus Health Group Tell Us?
The fact that Lotus Health Group is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses three years ago, but now it's earning 7.6% which is a sight for sore eyes. In addition to that, Lotus Health Group is employing 876% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
One more thing to note, Lotus Health Group has decreased current liabilities to 49% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.
The Bottom Line On Lotus Health Group's ROCE
In summary, it's great to see that Lotus Health Group has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 294% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Lotus Health Group can keep these trends up, it could have a bright future ahead.
If you'd like to know more about Lotus Health Group, we've spotted 2 warning signs, and 1 of them is potentially serious.
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.