To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So on that note, IHH Healthcare Berhad (KLSE:IHH) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for IHH Healthcare Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.071 = RM3.0b ÷ (RM49b – RM6.1b) (Based on the trailing twelve months to June 2022).
So, IHH Healthcare Berhad has an ROCE of 7.1%. Ultimately, that’s a low return and it under-performs the Healthcare industry average of 21%.
View our latest analysis for IHH Healthcare Berhad
Above you can see how the current ROCE for IHH Healthcare Berhad compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering IHH Healthcare Berhad here for free.
The Trend Of ROCE
Even though ROCE is still low in absolute terms, it’s good to see it’s heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 7.1%. Basically the business is earning more per dollar of capital invested and in addition to that, 22% more capital is being employed now too. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, a combination that’s common among multi-baggers.
The Bottom Line On IHH Healthcare Berhad’s ROCE
All in all, it’s terrific to see that IHH Healthcare Berhad is reaping the rewards from prior investments and is growing its capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 9.6% to shareholders. So with that in mind, we think the stock deserves further research.
While IHH Healthcare Berhad looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether IHH is currently trading for a fair price.
While IHH Healthcare Berhad isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
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