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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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at MyHealthChecked (LON:MHC) 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. To calculate this metric for MyHealthChecked, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = UK£1.2m ÷ (UK£10m - UK£1.6m) (Based on the trailing twelve months to June 2023).
Thus, MyHealthChecked has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 8.8% it's much better.
Check out our latest analysis for MyHealthChecked
Historical performance is a great place to start when researching a stock so above you can see the gauge for MyHealthChecked's ROCE against it's prior returns. If you'd like to look at how MyHealthChecked has performed in the past in other metrics, you can view this free graph of MyHealthChecked's past earnings, revenue and cash flow.
So How Is MyHealthChecked's ROCE Trending?
MyHealthChecked has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 14% on its capital. Not only that, but the company is utilizing 398% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
In Conclusion...
Long story short, we're delighted to see that MyHealthChecked's reinvestment activities have paid off and the company is now profitable. And since the stock has dived 81% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.