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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Wenzhou Kangning Hospital (HKG:2120) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Wenzhou Kangning Hospital, this is the formula:

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

0.061 = CN¥151m ÷ (CN¥3.0b - CN¥537m) (Based on the trailing twelve months to June 2024).

Therefore, Wenzhou Kangning Hospital has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 8.2%.

View our latest analysis for Wenzhou Kangning Hospital

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Wenzhou Kangning Hospital has performed in the past in other metrics, you can view this free graph of Wenzhou Kangning Hospital's past earnings, revenue and cash flow.

What Does the ROCE Trend For Wenzhou Kangning Hospital Tell Us?

In terms of Wenzhou Kangning Hospital's historical ROCE trend, it doesn't exactly demand attention. The company has employed 63% more capital in the last five years, and the returns on that capital have remained stable at 6.1%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Wenzhou Kangning Hospital's ROCE

As we've seen above, Wenzhou Kangning Hospital's returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 50% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Wenzhou Kangning Hospital does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.