Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Looking at Bamboos Health Care Holdings (HKG:2293), it does have a high ROCE right now, but lets see how returns are trending.
What is Return On Capital Employed (ROCE)?
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Bamboos Health Care Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.23 = HK$37m ÷ (HK$195m – HK$31m) (Based on the trailing twelve months to December 2020).
Thus, Bamboos Health Care Holdings has an ROCE of 23%. That’s a fantastic return and not only that, it outpaces the average of 9.3% earned by companies in a similar industry.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you’re interested in investigating Bamboos Health Care Holdings’ past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Bamboos Health Care Holdings’ ROCE Trending?
In terms of Bamboos Health Care Holdings’ historical ROCE movements, the trend isn’t fantastic. To be more specific, while the ROCE is still high, it’s fallen from 41% where it was five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.
What We Can Learn From Bamboos Health Care Holdings’ ROCE
In summary, Bamboos Health Care Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 24% in the last five years. On the whole, we aren’t too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
On a separate note, we’ve found 2 warning signs for Bamboos Health Care Holdings you’ll probably want to know about.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.
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