Investors seeking the next significant investment opportunity, commonly referred to as a 'multi-bagger,' should pay close attention to some crucial trends. In particular, two key indicators can signal a company’s potential for substantial growth: a growing return on capital employed (ROCE) and an increasing amount of capital employed. When a business demonstrates these trends, it indicates a solid strategy of reinvesting profits at higher rates of return, portraying a promising financial future.

Currently, HC Surgical Specialists, listed on the Catalist exchange under the ticker 1B1, boasts a notably high ROCE. However, understanding the nuances of how this return is evolving is essential for informed investment decisions.

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Understanding Return On Capital Employed (ROCE)

For those unfamiliar with the term, ROCE is a measure that evaluates the efficiency of a company in generating pre-tax profits from its capital. The calculation for HC Surgical Specialists is as follows:

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

Utilizing data from the trailing twelve months leading up to November 2024, HC Surgical Specialists reported:

0.30 = S$6.0 million ÷ (S$25 million - S$5.2 million)

This results in HC Surgical Specialists achieving an impressive ROCE of 30%. This performance is particularly noteworthy as it significantly exceeds the industry average of just 11% for similar companies.

For those interested in a deeper dive, our latest analysis on HC Surgical Specialists is available.

Trends in ROCE

While HC Surgical Specialists has maintained a strong ROCE, it is vital to recognize that the company’s returns on capital have remained relatively flat over the past five years. During the same timeframe, the total capital employed by the company has decreased by 21%. A reduction in the asset base often raises red flags for investors, as it can indicate potential underlying issues within the company.

Nevertheless, despite this decline in capital employed, the operational efficiency remains impressive, as evidenced by the high ROCE in absolute terms.

The Key Takeaway

It is concerning to note that HC Surgical Specialists appears to be diminishing in terms of its capital base. Moreover, the total return for shareholders over the past five years has been stagnant, which is not particularly surprising given the trends. Consequently, HC Surgical Specialists may lack the characteristics of a multi-bagger that many investors seek. For those specifically looking for high-growth investment opportunities, it might be advisable to explore options beyond this company.