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

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Cowealth Medical ChinaLtd (SHSE:603122), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Cowealth Medical ChinaLtd is:

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

0.033 = CN¥39m ÷ (CN¥1.5b - CN¥291m) (Based on the trailing twelve months to September 2024).

So, Cowealth Medical ChinaLtd has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 9.0%.

Check out 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 The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Cowealth Medical ChinaLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.3% from 12% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Cowealth Medical ChinaLtd has decreased its current liabilities to 20% of total assets. So we could link some of this to the decrease in ROCE. 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.

In Conclusion...

In summary, we're somewhat concerned by Cowealth Medical ChinaLtd's diminishing returns on increasing amounts of capital. And, the stock has remained flat over the last year, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Cowealth Medical ChinaLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

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.

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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.