What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, while the ROCE is currently high for HC Surgical Specialists (Catalist:1B1), we aren't jumping out of our chairs because returns are decreasing.
Understanding 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. The formula for this calculation on HC Surgical Specialists is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.31 = S$6.1m ÷ (S$31m - S$11m) (Based on the trailing twelve months to May 2023).
Therefore, HC Surgical Specialists has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Healthcare industry average of 8.6%.
See our latest analysis for HC Surgical Specialists
Historical performance is a great place to start when researching a stock so above you can see the gauge for HC Surgical Specialists' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of HC Surgical Specialists, check out these free graphs here.
So How Is HC Surgical Specialists' ROCE Trending?
Things have been pretty stable at HC Surgical Specialists, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. Although current returns are high, we'd need more evidence of underlying growth for it to look like a multi-bagger going forward.
Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 37% of total assets, this reported ROCE would probably be less than31% because total capital employed would be higher.The 31% ROCE could be even lower if current liabilities weren't 37% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.