UG Healthcare (Catalist:8K7) Is Reinvesting At Lower Rates Of Return

Yahoo

3 days ago

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at UG Healthcare (Catalist:8K7) and its ROCE trend, we weren't exactly thrilled.
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Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for UG Healthcare:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0019 = S$354k ÷ (S$232m - S$45m) (Based on the trailing twelve months to December 2024).
Therefore, UG Healthcare has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 7.8%.
See our latest analysis for UG Healthcare
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 UG Healthcare has performed in the past in other metrics, you can view this free graph of UG Healthcare's past earnings, revenue and cash flow.
How Are Returns Trending?
When we looked at the ROCE trend at UG Healthcare, we didn't gain much confidence. Around five years ago the returns on capital were 6.3%, but since then they've fallen to 0.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, UG Healthcare has done well to pay down its current liabilities to 19% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
Our Take On UG Healthcare's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that UG Healthcare is reinvesting for growth and has higher sales as a result. Despite these promising trends, the stock has collapsed 87% over the last five years, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for UG Healthcare (of which 1 is a bit unpleasant!) that you should know about.
While UG Healthcare 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.
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