Did you know there are some financial metrics that can provide clues to potential multi-baggers? Ideally, your business will show two trends.grow first return Capital Employed (ROCE), and second, is increasing amount of capital employed. Simply put, these types of businesses are MFPs, which means they are continuously reinvesting their earnings at ever higher rates of return. However, as a result of investigation, Hexter Healthcare Belhad (KLSE:HEXCARE), I think the current trend doesn’t fit the mold of multibaggers.
What is Return on Capital Employed (ROCE)?
For those of you who don’t know, ROCE is a measure of a company’s annual pre-tax earnings (earnings) relative to the capital used in the business. Analysts calculate Hextar Healthcare Berhad using the following formula:
Return on Capital Employed = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.0047 = RM2.8m ÷ (RM614m – RM20m) (Based on the last 12 months to September 2022).
So, Hextar Healthcare Berhad’s ROCE is 0.5%. In absolute terms, this is a low return, well below the household goods industry average of 8.6%.
Read the latest analysis from Hextar Healthcare Berhad.
The past isn’t representative of the future, but it’s helpful to know how the company has performed historically. If you would like to see how Hextar Healthcare Berhad has performed in the past against other metrics, please visit here. freedom Graphs of historical earnings, earnings and cash flow.
What can be learned from Hextar Healthcare Berhad’s ROCE trends?
Unfortunately, ROCE is down from 4.8% five years ago and employment capital is up 85%, so the trend isn’t good. However, some of the increase in capital used can be attributed to recent capital raises completed prior to the most recent reporting period, so keep that in mind when looking at the decline in ROCE As a result, Hextar Healthcare Berhad may not have received the full period of its earnings contributions, as it is unlikely that all of the funds raised are still working.
On a related note, Hextar Healthcare Berhad has reduced current liabilities to 3.2% of total assets. So part of this can be related to her decreased ROCE. This effectively means suppliers and short-term creditors fund less of the business, reducing the element of risk. Some argue that this makes businesses less efficient at generating ROCE. This is because we are now self-financing more businesses.
I am a little concerned about Hextar Healthcare Berhad as both its return on capital and turnover are declining despite more capital being put into the business. Despite these concerns about the fundamentals, the stock has delivered an 87% return over the past five years, leaving investors very optimistic. Either way, the current underlying trends don’t bode well for long-term performance, so unless they’re reversed, we’ll start looking elsewhere.
On another note, we found 4 warning signs from Hextar Healthcare Berhad you probably want to know.
For those who like to invest solid company, check this out freedom List of companies with solid balance sheets and high return on equity.
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This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst projections using only unbiased methodologies and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price sensitive company announcements or qualitative materials. Is not …
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