Cowealth Medical ChinaLtd (SHSE:603122) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Cowealth Medical ChinaLtd (SHSE:603122), we don't think it's current trends fit the mold of a multi-bagger.

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 Cowealth Medical ChinaLtd:

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

0.078 = CN¥91m ÷ (CN¥1.6b - CN¥377m) (Based on the trailing twelve months to September 2023).

Therefore, Cowealth Medical ChinaLtd has an ROCE of 7.8%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 11%.

See our latest analysis for Cowealth Medical ChinaLtd

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're interested in investigating Cowealth Medical ChinaLtd's past further, check out this free graph covering Cowealth Medical ChinaLtd's past earnings, revenue and cash flow.

What Can We Tell From Cowealth Medical ChinaLtd's ROCE Trend?

In terms of Cowealth Medical ChinaLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 19%, but since then they've fallen to 7.8%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Cowealth Medical ChinaLtd has done well to pay down its current liabilities to 24% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, Cowealth Medical ChinaLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 26% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Cowealth Medical ChinaLtd has the makings of a multi-bagger.

If you'd like to know about the risks facing Cowealth Medical ChinaLtd, we've discovered 2 warning signs that you should be aware of.

While Cowealth Medical ChinaLtd 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.