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Yestar Healthcare Holdings Company Limited (HKG:2393) Is Employing Capital Very Effectively

Simply Wall St

Today we'll look at Yestar Healthcare Holdings Company Limited (HKG:2393) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for Yestar Healthcare Holdings:

0.23 = CN¥693m ÷ (CN¥6.0b - CN¥2.9b) (Based on the trailing twelve months to June 2019.)

Therefore, Yestar Healthcare Holdings has an ROCE of 23%.

Check out our latest analysis for Yestar Healthcare Holdings

Does Yestar Healthcare Holdings Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Yestar Healthcare Holdings's ROCE is meaningfully better than the 11% 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. Putting aside its position relative to its industry for now, in absolute terms, Yestar Healthcare Holdings's ROCE is currently very good.

You can see in the image below how Yestar Healthcare Holdings's ROCE compares to its industry. Click to see more on past growth.

SEHK:2393 Past Revenue and Net Income, February 3rd 2020

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How Yestar Healthcare Holdings's Current Liabilities Impact Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.

Yestar Healthcare Holdings has total assets of CN¥6.0b and current liabilities of CN¥2.9b. As a result, its current liabilities are equal to approximately 49% of its total assets. Yestar Healthcare Holdings has a medium level of current liabilities, boosting its ROCE somewhat.

Our Take On Yestar Healthcare Holdings's ROCE

Even so, it has a great ROCE, and could be an attractive prospect for further research. Yestar Healthcare Holdings shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.