Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. So when we looked at Metro Healthcare Berhad (KLSE:MHCARE) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Metro Healthcare Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.17 = RM8.0m ÷ (RM51m – RM5.5m) (Based on the trailing twelve months to December 2022).
Thus, Metro Healthcare Berhad has an ROCE of 17%. In absolute terms, that’s a satisfactory return, but compared to the Healthcare industry average of 13% it’s much better.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Metro Healthcare Berhad, check out these free graphs here.
How Are Returns Trending?
Metro Healthcare Berhad has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it’s earning 17% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Metro Healthcare Berhad is utilizing 202% more capital than it was five years ago. 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.
What We Can Learn From Metro Healthcare Berhad’s ROCE
To the delight of most shareholders, Metro Healthcare Berhad has now broken into profitability. Since the stock has returned a staggering 683% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing: We’ve identified 3 warning signs with Metro Healthcare Berhad (at least 1 which doesn’t sit too well with us) , and understanding these would certainly be useful.
While Metro Healthcare Berhad 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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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