If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Lotus Health Group (SHSE:600186) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Lotus Health Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = CN¥257m ÷ (CN¥3.3b - CN¥1.2b) (Based on the trailing twelve months to September 2024).
So, Lotus Health Group has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 6.8% it's much better.
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'd like to look at how Lotus Health Group has performed in the past in other metrics, you can view this free graph of Lotus Health Group's past earnings, revenue and cash flow.
The Trend Of ROCE
We're delighted to see that Lotus Health Group is reaping rewards from its investments and is now generating some pre-tax profits. About four years ago the company was generating losses but things have turned around because it's now earning 12% on its capital. Not only that, but the company is utilizing 1,299% more capital than before, but that's to be expected from a company 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 36% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Lotus Health Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Bottom Line
Long story short, we're delighted to see that Lotus Health Group's reinvestment activities have paid off and the company is now profitable. And a remarkable 204% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 600186 on our platform that is definitely worth checking out.
While Lotus Health Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
