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Why You Should Like Yestar Healthcare Holdings Company Limited’s (HKG:2393) ROCE

Today we’ll look at Yestar Healthcare Holdings Company Limited (HKG:2393) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

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

Or for Yestar Healthcare Holdings:

0.20 = CN¥649m ÷ (CN¥5.4b – CN¥2.0b) (Based on the trailing twelve months to June 2018.)

Therefore, Yestar Healthcare Holdings has an ROCE of 20%.

View our latest analysis for Yestar Healthcare Holdings

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Is Yestar Healthcare Holdings’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Yestar Healthcare Holdings’s ROCE appears to be substantially greater than the 8.7% average in the Medical Equipment industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Yestar Healthcare Holdings’s ROCE in absolute terms currently looks quite high.

As we can see, Yestar Healthcare Holdings currently has an ROCE of 20%, less than the 29% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.

SEHK:2393 Last Perf January 21st 19
SEHK:2393 Last Perf January 21st 19

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Yestar Healthcare Holdings’s Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Yestar Healthcare Holdings has total liabilities of CN¥2.0b and total assets of CN¥5.4b. Therefore its current liabilities are equivalent to approximately 37% of its total assets. Yestar Healthcare Holdings has a medium level of current liabilities, boosting its ROCE somewhat.

The Bottom Line On Yestar Healthcare Holdings’s ROCE

Even so, it has a great ROCE, and could be an attractive prospect for further research. Of course you might be able to find a better stock than Yestar Healthcare Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like Yestar Healthcare Holdings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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