Returns At Shinva Medical InstrumentLtd (SHSE:600587) Are On The Way Up

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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 when we looked at Shinva Medical InstrumentLtd (SHSE:600587) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Shinva Medical InstrumentLtd:

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

0.088 = CN¥732m ÷ (CN¥16b - CN¥7.3b) (Based on the trailing twelve months to June 2024).

So, Shinva Medical InstrumentLtd has an ROCE of 8.8%. In absolute terms, that's a low return, but it's much better than the Medical Equipment industry average of 6.1%.

Check out our latest analysis for Shinva Medical InstrumentLtd

In the above chart we have measured Shinva Medical InstrumentLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shinva Medical InstrumentLtd .

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.8%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 55%. So we're very much inspired by what we're seeing at Shinva Medical InstrumentLtd thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 47%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Shinva Medical InstrumentLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Shinva Medical InstrumentLtd has. Considering the stock has delivered 26% 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.

If you'd like to know about the risks facing Shinva Medical InstrumentLtd, we've discovered 1 warning sign that you should be aware of.

While Shinva Medical InstrumentLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.