What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. However, after investigating Econ Healthcare (Asia) (Catalist:EHG), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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 Econ Healthcare (Asia), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = S$4.4m ÷ (S$102m - S$22m) (Based on the trailing twelve months to September 2022).
Thus, Econ Healthcare (Asia) has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 11%.
See our latest analysis for Econ Healthcare (Asia)
Above you can see how the current ROCE for Econ Healthcare (Asia) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Econ Healthcare (Asia).
So How Is Econ Healthcare (Asia)'s ROCE Trending?
On the surface, the trend of ROCE at Econ Healthcare (Asia) doesn't inspire confidence. Over the last two years, returns on capital have decreased to 5.6% from 8.8% two 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 may take some time before the company starts to see any change in earnings from these investments.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by Econ Healthcare (Asia)'s reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 25% in the last year. 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.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Econ Healthcare (Asia) (of which 1 is concerning!) that you should know about.