To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Modern Dental Group (HKG:3600) and its trend of ROCE, we really liked what we saw.
What is Return On Capital Employed (ROCE)?
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. The formula for this calculation on Modern Dental Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.17 = HK$493m ÷ (HK$3.7b – HK$668m) (Based on the trailing twelve months to December 2021).
Thus, Modern Dental Group has an ROCE of 17%. In absolute terms, that’s a satisfactory return, but compared to the Medical Equipment industry average of 10% it’s much better.
View our latest analysis for Modern Dental Group
In the above chart we have measured Modern Dental Group’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Modern Dental Group.
What The Trend Of ROCE Can Tell Us
Modern Dental Group is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 30%. So we’re very much inspired by what we’re seeing at Modern Dental Group thanks to its ability to profitably reinvest capital.
The Key Takeaway
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that’s what Modern Dental Group has. Given the stock has declined 22% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.
If you’d like to know about the risks facing Modern Dental Group, we’ve discovered 2 warning signs that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.