Reasons to be nervous about Medlive Technology’s (HKG:2192) return on capital

If we want to find a stock that can grow exponentially over the long term, what are the underlying trends we should be looking for?Ideally, businesses will exhibit two trends; the first is growing return Employed capital (ROCE), and secondly, increased quantity or used capital. Basically, this means that a company has a profitable plan that it can continue to reinvest, which is a hallmark of a compounding machine.Although, when we look at medical technology (HKG:2192), it doesn’t seem to tick all those boxes.

What is Return on Capital Employed (ROCE)?

For those who aren’t sure what ROCE is, it measures the amount of pre-tax profit a company can generate from the capital it uses in its business. To calculate this metric for Medlive technology, use the following formula:

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

0.0084 = RMB 36 million ÷ (RMB 4.3b – RMB 120 million) (Based on the past 12 months ending June 2022).

therefore, Medlive Technology’s ROCE is 0.8%. This is a low return in absolute terms, and it also underperforms the 10% average for the healthcare services industry.

Check Opportunities and Risks in the medical services industry in Hong Kong.

In the graph above, we measure Medlive Technology’s previous ROCE versus its previous performance, but arguably the future is more important.If you’re interested, you can check out our analyst forecasts free Report analysts’ forecasts for the company.

What is the return trend?

When we looked at Medlive Technology’s ROCE trends, we didn’t gain much confidence. More specifically, ROCE declined from 49% over the past three years. Although given the increase in both revenue and the number of assets used by the business, this could be a sign that the company is investing in growth, and the additional capital is causing a short-term decline in ROCE. If the increased capital generates additional returns, the business and even shareholders will benefit in the long run.

On a related note, Medlive Technology has reduced its current liabilities to 2.8% of total assets. Therefore, we can relate some of this to the decline in ROCE. What’s more, this reduces some aspects of business risk, as the company’s suppliers or short-term creditors are now less likely to fund their business. Some will claim that this makes the business less efficient at generating ROCE as it now uses its own money to fund more operations.

Our take on Medlive Technology’s ROCE

Despite a drop in return on capital in the short term, we found that Medlive Technology’s revenue and capital employed increased. But with the stock down 84% last year, there may be other drivers that are weighing on the business’s outlook. Therefore, we recommend researching the stock further to discover more about the business.

One more thing, we found 2 Warning signs Confront Medlive technologies that might interest you.

If you are looking for a reliable company with good income, check this out free List of companies with good balance sheets and decent returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based solely on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to provide financial advice. It does not constitute advice to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to bring you long-term focused analytics driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Wall Street has no positions in any of the stocks mentioned.