If you're looking for a multi-bagger, there are a few things to look for. First, a proven growing return on invested capital (ROCE), followed by a growth in invested capital. Essentially this means the company has profitable endeavors that it can continually reinvest in, which is the hallmark of a compounding machine. However, when we looked at Econ Healthcare (Asia) (Catalist:EHG), it didn't seem to check all of these boxes.
Understanding Return on Invested Capital (ROCE)
For those who don't know, ROCE is the ratio of a company's annual pre-tax profit (revenue) to the capital employed in the business. Analysts use the following formula to calculate Econ Healthcare (Asia)'s ROCE:
Return on Invested Capital = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.087 = S$6.9m ÷ (S$105m – S$27m) (Based on the trailing twelve months to March 2024).
Thus, Econ Healthcare (Asia) has an ROCE of 8.7%. Although that's a low return in itself, it compares well with the average of 7.0% generated by the Healthcare industry.
Check out our latest analysis for Econ Healthcare (Asia)
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Historical performance is always a great place to start when researching a stock, and above you can see a graph of Econ Healthcare (Asia)'s ROCE compared to its past earnings: If you'd like to delve deeper into past earnings, you can take a look at these free graphs which detail Econ Healthcare (Asia)'s earnings and cash flow performance.
What are the trends in returns?
There are other companies that have realized better returns on capital than those seen at Econ Healthcare (Asia). The company has deployed 51% more capital over the past four years, yet its return on capital has remained stable at 8.7%. Given that the company has increased the amount of capital deployed, it appears that previous investments simply have not delivered a higher return on capital.
Conclusion on Econ Healthcare (Asia)'s ROCE
As we can see above, Econ Healthcare (Asia)'s return on capital is not growing, but it is reinvesting in the business. Investors may not be too optimistic about this improving trend either, as the share price has fallen 33% over the past three years. Overall, the inherent trend is not typical of a multi-bagger, so if you're after a multi-bagger, you may have better luck with other stocks.
Finally, we've spotted 3 warning signs for Econ Healthcare (Asia) that you should be aware of.
Econ Healthcare (Asia) may not be earning the highest profit margins currently, but we have compiled a list of companies currently earning ROE above 25% – take a look at this free list here.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
