If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Modern Dental Group (HKG:3600) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
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 Modern Dental Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.13 = HK$333m ÷ (HK$3.5b – HK$931m) (Based on the trailing twelve months to June 2022).
Thus, Modern Dental Group has an ROCE of 13%. On its own, that’s a standard return, however it’s much better than the 11% generated by the Medical Equipment industry.
Check out our latest analysis for Modern Dental Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Modern Dental Group’s ROCE against it’s prior returns. If you want to delve into the historical earnings, revenue and cash flow of Modern Dental Group, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
Modern Dental Group 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 43% whilst employing roughly the same amount of capital. So it’s likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn’t changed considerably. It’s worth looking deeper into this though because while it’s great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 27% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It’s worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
Our Take On Modern Dental Group’s ROCE
To bring it all together, Modern Dental Group has done well to increase the returns it’s generating from its capital employed. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company’s current valuation metrics and future prospects seems fitting.
Like most companies, Modern Dental Group does come with some risks, and we’ve found 3 warning signs that you should be aware of.
While Modern Dental Group isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Valuation is complex, but we’re helping make it simple.
Find out whether Modern Dental Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.