Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Hextar Healthcare Berhad (KLSE:HEXCARE), we don’t think it’s current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Hextar Healthcare Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.0047 = RM2.8m ÷ (RM614m – RM20m) (Based on the trailing twelve months to September 2022).
SW, Hextar Healthcare Berhad has an ROCE of 0.5%. In absolute terms, that’s a low return and it also under-performs the Household Products industry average of 8.6%.
Check out our latest analysis for Hextar Healthcare Berhad
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’d like to look at how Hextar Healthcare Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Hextar Healthcare Berhad’s ROCE Trend?
Unfortunately, the trend isn’t great with ROCE falling from 4.8% five years ago, while capital employed has grown 85%. However, some of the increase in capital employed could be attributed to the recent capital raising that’s been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It’s unlikely that all of the funds raised have been put to work yet, so as a consequence Hextar Healthcare Berhad might not have received a full period of earnings contribution from it.
On a related note, Hextar Healthcare Berhad has decreased its current liabilities to 3.2% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business’ efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Key Takeaway
We’re a bit apprehensive about Hextar Healthcare Berhad because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these concerning fundamentals, the stock has performed strongly with an 87% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don’t bode well for long term performance so unless they reverse, we’d start looking elsewhere.
On a separate note, we’ve found 4 warning signs for Hextar Healthcare Berhad you’ll probably want to know about.
For those who like to invest in solid companies, check out this free List of companies with solid balance sheets and high returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. sign up here