[ad_1]
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at IHH Healthcare Berhad (KLSE:IHH) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on IHH Healthcare Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.07 = RM2.9b ÷ (RM50b – RM8.3b) (Based on the trailing twelve months to June 2023).
Therefore, IHH Healthcare Berhad has an ROCE of 7.0%. In absolute terms, that’s a low return and it also under-performs the Healthcare industry average of 15%.
View our latest analysis for IHH Healthcare Berhad
In the above chart we have measured IHH Healthcare Berhad’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering IHH Healthcare Berhad here for free.
The Trend Of ROCE
IHH Healthcare Berhad is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 32% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company’s efficiencies. On that front, things are looking good so it’s worth exploring what management has said about growth plans going forward.
What We Can Learn From IHH Healthcare Berhad’s ROCE
In summary, we’re delighted to see that IHH Healthcare Berhad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 20% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
On a final note, we’ve found 1 warning sign for IHH Healthcare Berhad that we think you should be aware of.
While IHH 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.
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.
[ad_2]
Source link