If you are looking for a multi-bagger, there are a few things to look out for. Ideally, a business will display two trends; first growth to recover on capital employed (ROCE) and on the other hand, an increase amount capital employed. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. That said, from the first glance at Raffles Medical Group (SGX: BSL) we’re not jumping from our chairs on the yield trend, but taking a closer look.
Understanding Return on Capital Employed (ROCE)
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. To calculate this metric for Raffles Medical Group, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.099 = $ 112 million ($ 1.5 billion – $ 318 million) (Based on the last twelve months up to June 2021).
So, Raffles Medical Group has a ROCE of 9.9%. In absolute terms, this is a low return, but it sits around the healthcare industry average of 8.5%.
Check out our latest review for Raffles Medical Group
Above you can see how Raffles Medical Group’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
What the ROCE trend can tell us
Returns on capital have not changed much for Raffles Medical Group in recent years. Over the past five years, ROCE has remained relatively stable at around 9.9% and the company has deployed 66% more capital in its operations. Since the company has increased the amount of capital used, it seems that the investments that have been made are simply not providing a high return on capital.
The bottom line
In short, Raffles Medical Group simply reinvested capital and generated the same low rate of return as before. And since the stock has only returned 5.5% in the past five years to shareholders, one could argue that they are aware of these lackluster trends. So if you’re looking for a multi-bagger, the underlying trends indicate you might have a better chance elsewhere.
If you are still interested in Raffles Medical Group, it is worth checking out our FREE approximation of intrinsic value to see if it trades attractively in other respects.
Although Raffles Medical Group doesn’t get the highest return, check out this free list of companies that generate high returns on equity with strong balance sheets.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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