We Like These Underlying Return On Capital Trends At Canature Health Technology (SZSE:300272)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Canature Health Technology (SZSE:300272) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Canature Health Technology is:

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

0.10 = CN¥183m ÷ (CN¥3.0b - CN¥1.2b) (Based on the trailing twelve months to June 2024).

Therefore, Canature Health Technology has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 8.8% generated by the Consumer Durables industry.

Check out our latest analysis for Canature Health Technology

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 Canature Health Technology has performed in the past in other metrics, you can view this free graph of Canature Health Technology's past earnings, revenue and cash flow.

What Can We Tell From Canature Health Technology's ROCE Trend?

The trends we've noticed at Canature Health Technology are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 10%. Basically the business is earning more per dollar of capital invested and in addition to that, 46% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 40% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Canature Health Technology's ROCE

All in all, it's terrific to see that Canature Health Technology is reaping the rewards from prior investments and is growing its capital base. Considering the stock has delivered 30% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing, we've spotted 2 warning signs facing Canature Health Technology that you might find interesting.

While Canature Health Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.