Alibaba Health Information Technology (HKG:241) Might Have The Makings Of A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Alibaba Health Information Technology (HKG:241) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Alibaba Health Information Technology, this is the formula:

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

0.015 = CN¥247m ÷ (CN¥21b – CN¥5.2b) (Based on the trailing twelve months to September 2023).

Therefore, Alibaba Health Information Technology has an ROCE of 1.5%. In absolute terms, that’s a low return and it also under-performs the Consumer Retailing industry average of 8.5%.

Check out our latest analysis for Alibaba Health Information Technology

roce
SEHK:241 Return on Capital Employed March 29th 2024

Above you can see how the current ROCE for Alibaba Health Information Technology compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Alibaba Health Information Technology for free.

What Can We Tell From Alibaba Health Information Technology’s ROCE Trend?

Alibaba Health Information Technology has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.5% on its capital. And unsurprisingly, like most companies trying to break into the black, Alibaba Health Information Technology is utilizing 514% more capital than it was five years ago. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company’s ratio of current liabilities to total assets has decreased to 24%, which basically reduces it’s funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business’ underlying economics, which is great to see.

What We Can Learn From Alibaba Health Information Technology’s ROCE

Long story short, we’re delighted to see that Alibaba Health Information Technology’s reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 65% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we’ve found 1 warning sign for Alibaba Health Information Technology that we think you should be aware of.

While Alibaba Health Information Technology may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Valuation is complex, but we’re helping make it simple.

Find out whether Alibaba Health Information Technology is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.

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