To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Town Health International Medical Group's (HKG:3886) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

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 Town Health International Medical Group, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.026 = HK$114m ÷ (HK$4.7b - HK$421m) (Based on the trailing twelve months to December 2021).

So, Town Health International Medical Group has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 9.9%.

Check out our latest analysis for Town Health International Medical Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Town Health International Medical Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Town Health International Medical Group, check out these free graphs here.

What Can We Tell From Town Health International Medical Group's ROCE Trend?

Shareholders will be relieved that Town Health International Medical Group has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 2.6%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

The Bottom Line

In summary, we're delighted to see that Town Health International Medical Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 59% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Town Health International Medical Group does have some risks though, and we've spotted 2 warning signs for Town Health International Medical Group that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.