Pine Care Group (HKG: 1989) may have difficulty using its capital efficiently

What trends should we look for if we are to identify stocks that can multiply in value over the long term? First, we would like to identify a growth return on capital employed (ROCE) and at the same time, a based capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. In light of this, when we looked at Pine care group (HKG: 1989) and its ROCE trend, we weren’t exactly thrilled.

Understanding Return on Capital Employed (ROCE)

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Pine Care Group, here is the formula:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.065 = HK $ 33million ÷ (HK $ 941million – HK $ 433million) (Based on the last twelve months up to September 2020).

Therefore, Pine Care Group has a ROCE of 6.5%. In absolute terms, that’s a low return, and it’s also below the healthcare industry average of 9.8%.

See our latest review for Pine Care Group

Historical performance is a great place to start when looking for a stock. So above you can see the gauge of Pine Care Group’s ROCE compared to its past performance. If you want to dive into Pine Care Group’s historic earnings, revenue and cash flow, check out these free graphics here.

What is the trend for returns?

When we looked at the ROCE trend at Pine Care Group, we didn’t gain much trust. About five years ago, returns on capital were 19%, but since then they have fallen to 6.5%. Although, as income and the amount of assets used in the business have increased, this could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. And if the capital increase generates additional returns, the company, and therefore shareholders, will benefit in the long run.

Another thing to note, Pine Care Group has a high ratio of current liabilities to total assets of 46%. This can lead to certain risks as the business is essentially operating with quite a lot of dependence on its suppliers or other types of short-term creditors. Ideally, we would like this to decrease as that would mean less risky bonds.

Pine Care Group’s ROCE result

While returns have fallen for Pine Care Group lately, we are encouraged to see sales increasing and the company reinvesting in its operations. And the stock followed suit, returning 60% to shareholders over the past three years. So if these growth trends continue, we would be optimistic about the future of the title.

If you’re interested in learning more about Pine Care Group, we’ve spotted 3 warning signs, and 2 of them are significant.

While Pine Care Group does not currently achieve the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.

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