In This Article:
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Raffles Medical Group (SGX:BSL) so let's look a bit deeper.
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 Raffles Medical Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = S$149m ÷ (S$1.5b - S$404m) (Based on the trailing twelve months to June 2022).
Thus, Raffles Medical Group has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 12% generated by the Healthcare industry.
See our latest analysis for Raffles Medical Group
In the above chart we have measured Raffles Medical Group's 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 Raffles Medical Group's ROCE Trending?
We like the trends that we're seeing from Raffles Medical Group. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 13%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 44%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
What We Can Learn From Raffles Medical Group's ROCE
To sum it up, Raffles Medical Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 45% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Like most companies, Raffles Medical Group does come with some risks, and we've found 1 warning sign that you should be aware of.
While Raffles Medical Group 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.